By Tony D’Altorio, Investment U Research Friday, May 6, 2011

China is both the world’s biggest producer of coal and the world’s largest coal consumer. It used to unearth enough of the commodity to meet domestic demand. But in 2009, the giant nation became a net importer of thermal coal. And prices have skyrocketed ever since…

Earlier this year, coal mining companies and Asian utilities settled the 2011-12 annual contracts at a record high of US$130 a ton. This marks a 32.6 percent difference over the US$98 price tag decided in 2011-11. Some of the blame for such hikes falls on China’s less-than-perfect infrastructure. For example, last year’s 60-mile long traffic jam happened in part due to too many trucks transporting coal to key areas. In other words: Chinese production and related infrastructure problems are calling the shots these days.

Coal Infrastructure Bottlenecks

China’s current coal supply situation is very tight. Chinese officials now warn that some provinces may suffer electricity shortages over the hot summer months, as people turn to their air conditioners. In order to solve this problem, the country has begun work on large rail infrastructure projects. Once completed, trains will move coal from China’s mining regions in the north and west to its consumer regions in the south and east. Wall Street thinks the efforts “unnecessary.” Then again, Wall Street never had to deal with 60-mile traffic jams…

According to the Ministry of Railroads, China could transport 50 percent more coal this way in the next five years. That means an increase from 2 billion tons last year to 3 billion in 2015. In the long run, that should put downward pressure on domestic coal prices, since riding the rails costs less than hitting the road. But China still has a ways to go before it can expect any such difference…

China’s Coal Consolidation Program

Even as China moves forward to improve its infrastructure, the coutnry is continuing other coal-related plans. Its domestic coal mining consolidation program aims to shut small and often dangerous mines creating a handful of state-related giants in their place. It began this plan in 2009 in the Shanxi province, but is now spreading it to neighboring areas as well. The sheer number of mines closed or reorganized in this way contributed to the coal import boost of 2009 and 2010. In the three quarters of 2009 alone, coal production in Shanxi fell 10 percent, forcing China to increase imports by 171 percent.

And even though the program is winding down there, its effects on similar provinces has just begun. That burden should keep the country importing coal at least until the middle of the decade. By then, China should have the transportation issue solved and its consolidation program complete. If everything else remains stable, Chinese coal imports should decrease. But if demand continues to increase – as is likely, due to rising electricity demand – coal imports from China will continue unabated.

Good investing,

Tony D’Altorio

Reprinted with permission of the publisher. The above story can be read on the website www.investmentU.com. The direct link is: http://www.investmentu.com/2011/May/chinas-coal-industry-reform.html

Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Views expressed are not FNArena's (see our disclaimer).

FN Arena is building the future of financial news reporting at www.fnarena.com . Our daily news reports can be trialed at no cost and with no obligations. Simply sign up and get a feel for what we are trying to achieve.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FN Arena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.

More from IBT Markets:
Newsletter: To receive Global Markets update, sign up here