Last year, China’s state council announced that it will shut down at least 2,000 out of approximately 10,000 to 12,000 small coal mines with capacity of up to 90,000 tonnes a year by the end of 2015. The government will focus the closures on mines with substandard coal and poor safety records.
While the government aims to close smaller mines, last year, it approved construction of 101.3 million new coal capacity in 2013, up from 16.6 million tonnes approved in 2012. Most of this additional capacity will be developed in the Shaanxi and Inner Mongolia regions, reflecting China’s goal of consolidating output and shutting down smaller mines. Cost improvements arising from economies of scale would apply downward pressure as large suppliers’ expansions weed out inefficient and high-cost miners in the short to medium term. This would be negative for world urea prices, the Market Vectors Agribusiness ETF (MOO), CF Industries Holdings Inc. (CF), Terra Nitrogen Company LP (TNH), Agrium Inc. (AGU), and CVR Partners LP (TNH).
Coal production growth in 2014
For 2014, China’s National Coal Association sees supply growth of 2.7%, with expectations that production will increase to 3.80 billion tonnes. Whether this expectation will prove true is up to debate. In 2013, China’s coal production grew just ~1.4%, rising from 3.65 billion tonnes in 2012 to 3.70 billion tonnes. Domestic railway bottlenecks, cheaper seaborne supplies, and the displacement of costlier miners were the main factors that contributed to the weak growth.
Coal production in China is largely concentrated in the northern part of the country, where reserves are abundant. However, demand for coal largely centers around the Eastern and Southern coasts of the country, where cities and industrial activities are situated, so producers have to use rail to transport coal to Qinhuangdao port in the northeast of the country to export thermal coal to the rest of the country. Railway bottlenecks have capped domestic producers’ ability to supply as much coal as they would have wanted.
The National Development and Reform Commission announced earlier this year (2014) that it aims to increase annual railway capacity for coal to 3.0 billion tonnes by 2020, up from 2.26 billion tonnes in 2012. Railway expansions could negatively affect coal prices and possibly urea prices, as they allow more supply to be delivered to the market.
© 2013 Market Realist, Inc.