Chinese coal producers seek new ventures

Coal is a tough business, especially in China. Faced with slowing domestic demand and attempts to reduce pollution, diversifying into other countries and commodities is the way forward.
Recent deals by China Shenhua Energy Co. and Yanzhou Coal Mining Co. indicate they are already starting to think this way, but they will need to move faster.
Coal is primarily burned to produce electricity and supplies more than 70% of China’s energy needs, but it is becoming increasingly unpopular because of the pollution it emits. Beijing has pledged to combat pollution, after air-quality indexes showed dangerously highly levels of airborne particulate matter in the capital city earlier in 2013.
Jefferies Asset Management notes that the country’s coal consumption is close to peaking because of an inevitable slowdown in infrastructure construction.
Chinese coal producers have already started to diversify away from their core operations in an effort to find other streams of income to offset the softening demand for coal.
Late last year, Shenhua, the country’s largest coal producer by output, and other coal producers such as Huadian Coal Industry Group entered China’s natural-gas market after they won auctions for shale-gas blocks in southern China.
China, the world’s top energy user, has yet to start large-scale shale production, but it has ambitions to produce 80 billion cubic meters of shale gas by 2020 to help meet its growing demand for cleaner fuels.
In addition, Yanzhou Coal Mining bought 19 potash mineral exploration permits in Canada’s Saskatchewan province for US$260 million in 2011. Potash is used mostly as a fertilizer, but also has a range of industrial uses.
“The issue is, they’re diversifying into railway lines and power stations. The returns on invested capital on rail lines in China are historically lower than its returns on invested capital in coal mining,” Bernstein Research Analyst Michael Parker said.
Shenhua says it is looking beyond China. Its chairman said at a news conference that he is looking at acquisition targets in Australia, Indonesia, Russia and Mongolia. Shenhua’s parent has signed an agreement with partners on a US$2 billion project to develop coal reserves and infrastructure in Eastern Siberia and the Russian Far East.
Yanzhou Coal has similarly set its sights overseas, investing around US$2.1 billion in Australia’s Gloucester Coal Ltd. through a reverse takeover completed last year. Management has plans to invest US$620.7 million to nearly double coal output at its Australian mines over the next five years or so, hoping that will offset a slowdown in production from its main base in Shandong, China. Yanzhou is betting on demand from China, South Korea, Japan and Taiwan for its Australian coal.
Yanzhou Chairman Li Weimin said the returns for potash are much higher compared with its core coal business because of tight potash supply in China. The country imported around 4.3 million tons of potash in 2011, he estimated, most of which is used for fertilizing fruit and vegetable crops.
“Preliminary exploration…revealed that the area contains plentiful high-grade potash resources, showing that it has promising development prospects,” Li said, adding the Canadian land could hold 39.7 billion tons of potash resources, much larger than China’s total reserves of around 500 million tons.
(March 28, 2013)