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The “China Moment” in Coal

|Includes: Puda Coal, Inc. (PUDA), YZC

It happened quietly in 1993...the first time China became a net importer of oil since the 1960s.

In 1993, China imported a mere 30,000 barrels of oil per day. Now it imports 5 million barrels of oil per day.

1993 was an example of a “China moment”. This is what happens when the world's most populous country moves from being an exporter to a net importer of a particular resource.

The impact on prices is not immediately clear. But over time, as the country's import needs grow larger and larger, prices generally move much higher.

It has happened with oil and other commodities such as soybeans. Now it is coal’s turn.

China and Coal

Last year, China became a net importer of coal for the first time. Including both coking coal, used in steelmaking, and thermal coal, used to fire power plants, Beijing bought 104 million tons of coal. This compares to net exports of 80 million tons as recently as 2003.

The amount of coal imported pales in comparison to the amount of coal China mines locally, which is about 3.3 billion tons.

Beijing's shift to net imports reflects in part a clampdown on illegal and unsafe mining, which has forced the closure of hundreds of small mines.

The government's drive to consolidate the industry in Shanxi province, home of China's most easily accessible reserves, has also restricted production. The consolidation drive is now moving to Henan, another big producing province. Shandong and Inner Mongolia are expected to follow.

By consolidating, Beijing wants to improve safety and environmental performance and, over time, raise output. Beijing would like to see its large coal companies such as Yangzhou Coal ADR (NYSE: YZC) get bigger as it closes the inefficient and often dangerous smaller coal mines.

China's shift to an importer is helping to revive the global coal industry. But China is not alone.

India and the Rest of Asia

India's huge and rising coal needs are just as critical and will help keep coal prices high. Forecasts are that India will overtake South Korea as the world's second-largest buyer before the end of the decade.

The increase in demand comes as India continues to expand its coal-fired power generation capacity. According to the World Bank, 40 percent of homes in India are still without electricity. The country's authorities see coal as a “poverty alleviation” tool to spread electricity across the country.  

Coal is being buoyed by the requirements of China and India on top of already huge imports elsewhere in Asia, including Taiwan and South Korea. The growth of South Korea and Taiwan is also likely to support the market as these countries switch power generation from crude oil.

At the same time Vietnam, a medium-sized exporter of coal, has signaled that it might become an importer in three to five years. This will occur as rapid urbanization and industrialization increase coal needs. Government estimates that the country may need to import 100 million tons of coal annually by 2020.

The speed of the upturn in demand has surprised many and the industry is not well placed to cope. Bottlenecks in key exporting countries such as Australia – the world's top coal exporter – will hamper deliveries.

The impact on coal prices has already been significant, even if muted by the global economic crisis.

Thermal coal in Australia, an industry benchmark, surged this year to above $100 a ton. In coking coal, miners and steelmakers have closed contracts for April-June at $200 a ton, the second-highest level yet for quarterly arrangements.

Puda Coal

One company set to benefit from the surging demand and the “China moment” in coal is Puda Coal (AMEX: PUDA). It has been selected by the government as one of the coal mine consolidators in China.

Up till now, Puda has been solely a coking coal washer for the Chinese steel industry, albeit a very profitable one. The company has three coal washing facilities with annual capacity of 3.5 million metric tons.

Last fall, the company took its first step in moving upstream and actually owning coal assets. Puda is consolidating eight coal mines in Shanxi Province into five, increasing the mines' total annual capacity from 1.6 million to 3.6 million metric tons.

Then in late 2009, Puda purchased two additional thermal coal mines in Shanxi Province. The company plans to double the two coal mines' annual capacities of 450,000 metric tons to 900,000 metric tons.

Finally in March 2010, Puda announced plans to acquire and consolidate four coking coal mines into one mine in Shanxi Province. The annual capacity is expected to jump from 720,000 metric tons to 900,000 metric tons.

All of these moves have strengthened the company's position as a major coal mining player in Shanxi Province. As mentioned previously, Shanxi Province is perhaps China's top coal mining province.

With China's growing hunger for energy and coal, the company's transformation into an integrated coal mining business in China will help increase shareholder value in the years ahead.