Introduction: What is the prospect of coking coal?
summary
Overcapacity is not resource surplus. Human impatience and shortsightedness have erupted in today’s coal production field, with limited coal resources being exploited without restraint, resulting in severe overcapacity and a serious imbalance between supply and demand.
Coking coal is one of the most precious and scarce resources on Earth. Although China has the most coking coal resources in the world, after more than 30 years of high-intensity mining, high-quality coking coal is facing depletion. It is difficult to find high-quality coking coal fields with reserves of over 100 million tons throughout China.
Australia, the United States, and Canada, which are major producers of coking coal, have very limited future capacity additions. The supply and demand relationship of high-quality coking coal will experience a reversal in the next 5 years or so. If the supply-demand relationship deviates by 5%, it will lead to a surge in prices, and the era of severe shortage of main coking coal is not far away. Only by mastering sufficient high-quality scarce resources can we have the right to speak and even survive in tomorrow’s world. This should not only be a corporate strategy, but also a national strategy.
- Overview
In the history of the development of material civilization in human society, the “power” represented by steam locomotives, the “speed” represented by microwave communication, and the “capacity” represented by computer chips have all been advancing rapidly. Only the “hardness” represented by steel smelting has not undergone any qualitative changes for thousands of years. This is determined by the physical characteristics and chemical properties of the steelmaking process.
In the process of smelting steel, coke has the functions of melting, skeleton, and redox reactions on iron ore. Only coke, a special furnace material, possesses this “trinity” function, making it irreplaceable. Although electric furnaces can also produce steel, they are limited to recycling scrap steel, and the cost of electricity is much higher than that of coke. Although blast furnace injection technology was invented, it was only a cost saving measure taken due to the high cost of coke and cannot replace coke. Coke is made by sintering coking coal, also known as metallurgical coal. It is a type of bituminous coal with medium to low volatility, medium cohesiveness, and strong cohesiveness. In China’s national coal classification standards, it is a term for bituminous coal with high coalification and good coking properties, also known as main coking coal.
Coking coal is not only a fuel for steel production, but also a raw material for steel production. Coking coal is a globally scarce resource with an irreplaceable position and is extremely precious. However, the current production status and growth potential of coking coal are worrying, and there is a serious risk of shortage in the “food” of steel.
The supply and demand relationship of high-quality coking coal will undergo a reversal in the next 5 years, gradually transitioning from a buyer’s market to a seller’s market. If the supply-demand relationship deviates by 5%, it will lead to soaring prices, and the era of severe shortage of main coking coal is not far away.
- The distribution and production status of coking coal worldwide
Coking coal in the coal family is one of the most precious and scarce resources worldwide, accounting for 10% of coal reserves, of which the main coking coal only accounts for 2.4% of the entire coal type. The reserves and production of coking coal are relatively concentrated, while the consumption is relatively dispersed, thus requiring a large amount of international trade.
2.1 Overview of Global Coking Coal Distribution
25% of the world’s coking coal is stored in China, 25% in other Asian countries outside of China, 25% in the United States and Canada, and 25% in Australia and other countries around the world.
Shanxi has the largest coking coal reserves in China, accounting for 55% of China’s coking coal reserves. The coking coal reserves of other provinces and regions such as Hebei, Henan, Shaanxi, Anhui, Shandong, Guizhou, Heilongjiang, Inner Mongolia, and Xinjiang account for 45% of China’s total coking coal reserves. The world’s highest quality coking coal is in Shanxi. The highest quality coking coal in Shanxi is located in Lvliang Mountain.
The coal in Shanxi mainly occurs in two major coal bearing strata, the Shanxi Formation and the Taiyuan Formation. The Taiyuan Formation coal bearing strata, which are buried shallowly and have low ash and sulfur content, are very high-quality coal types. However, after more than 30 years of high-intensity mining, they are facing depletion. The coal bearing strata of the Shanxi Formation, which are buried deeper, are high in ash and sulfur, with a large portion being inferior coal types, especially coking coal, which has high ash and sulfur content.
2.2 Production situation in China and the world
2.2.1 Current situation of coking coal production in China
The place with the largest coking coal reserves in the world is China, and China’s coking coal resources account for 20% of China’s total coal resources, which is twice the world average. However, China’s coking coal mining output accounts for about 35% of China’s coal resources. This indicates that the consumption rate of coking coal in China is significantly higher than that of other coal types, in other words, the depletion of coking coal resources in China is much earlier than that of other coal types.
The largest coking coal production enterprise in China is Shanxi Coking Coal Group, with a clean coal recovery rate of around 33%, ash content of around 10%, and most products containing sulfur greater than 1.5%. A 33% recovery rate means that for every ton of clean coal produced, about 3 tons of raw coal need to be mined, and the high cost can be imagined. A 10% ash content means that the coke produced during steel smelting increases furnace temperature and decreases production by several percentage points. A sulfur content of 1.5% means that it cannot be coking alone and must be mixed with other types of coal to reduce the sulfur content to below 1%, otherwise the smelted steel will be seriously unqualified. The coal mines in the Lvliang Mountain area, located in the hinterland of the Hedong coalfield, have basically completed the extraction of the highest quality No. 4 coking coal. The next No. 6 coking coal to be extracted has a sulfur content as high as 2.5%, and its prospects are worrying.
Shenhua Group, the king of coal production in China, produces about 400 million tons of raw coal annually, and only its Wuhai base produces coking coal and refines coke. Due to the high sulfur and ash content of Wuhai coking coal, the steel produced by smelting is not qualified. After using the tamping coking technology, the sales of coking coal have been smooth. However, due to the favorable market, Wuhai Company has increased its production of high-quality coking coal from the originally designed annual output of 2 million tons to 6 million tons, which is equivalent to shortening the lifespan of the original mine by three times.
The situation of other coking coal production enterprises across the country is also not optimistic. Some coking coal production enterprises of Shandong Energy Group are already mining resources more than 1200 meters deep underground. Coal enterprises in Heilongjiang have serious social stability problems due to resource depletion. Coking coal production enterprises in Hebei, Shaanxi, Henan and other places are also facing the situation of resource depletion, resource degradation, and difficult mining (Table).
2.2.2 Current Status of Coking Coal Production Abroad
Australia produces 460 million tons of coal annually, including 160 million tons of coking coal. The United States produces 1 billion tons of coal annually, including 90 million tons of coking coal. Canada produces 70 million tons of coal annually, including 30 million tons of coking coal. The coking coal produced by Russia and Ukraine can only meet their own steel production needs. Other countries have almost no coking coal resources to mine.
Countries and regions in the world that require a large amount of coking coal for steel smelting, such as Japan, South Korea, Taiwan, Brazil, Peru, etc., do not have coking coal resources. India has only discovered 500 million tons of coking coal resources, with almost no mining value, so over 98% of its coking coal relies on imports. Looking at the global landscape of coking coal, Australia is the main supplier to India. Canada and Mongolia are China’s main suppliers, but Mongolia’s political ecology, land transportation, and coking coal quality, combined with other factors, result in significantly lower overall competitiveness and stability in the market compared to Canada.
2.3 Trade situation of coking coal
Australia is the world’s largest exporter of coking coal, with only seven to eight million tons of its 160 million tons of coking coal used for its domestic 5 million ton coke plant, and the rest for export. Australia has abundant coking coal reserves, but the resources have already been divided and controlled to the point of exhaustion. There are not many opportunities to continue building new coking coal mines, otherwise Shenhua Group would not have invested in developing thermal coal resources in Australia.
The United States produces 90 million tons of coking coal annually, which can basically meet the needs of its 50 million ton coking plant. However, due to the incomplete variety or quality defects of its coking coal, it must also import some high-quality main coking coal from Canada, while its exports to the European Union and Asia mainly consist of a small amount of surplus one-third coking coal.
The abundance coefficient of coal reserves in Canada is no less than that in China. Chinese counterparts often question why coal formed in the Late Cretaceous period is considered thermal coal in China and coking coal in Canada? In fact, the vast majority of coal in Canada, like in China, is thermal coal, with only coal in the Rocky Mountains possibly being coking coal. The Rocky Mountains run north-south through British Columbia, Canada and are known as the “backbone” of North America.
The high temperature and pressure generated during the mountain building movement in the Rocky Mountains were just right and timely, which led to the upgrading of ordinary thermal coal in this region to mainly coking coal. In other words, Canada has ten provinces and three regions, but almost all coking coal is located in British Columbia. The coal bearing strata in British Columbia are mainly the upper “Gated Formation” and the lower “Gated Formation”. The Gated Formation is either exposed to the ground and has been eroded by wind, or buried deep below several thousand meters and cannot be mined. There is a severe shortage of land that is neither deep nor shallow, and the coal seam dip angle is suitable for mining.
Although the Gassen Formation is relatively intact, the coal seams are much thinner than those of the Gassen Formation. For example, the Gait Formation in the Gassen Coalfield has been eroded, the geological structure of the Sakunka Coalfield is complex and cannot be mined, the dip angle of the strata in the Bulmos Coalfield is too large, and the mining cost is too high. Although the resources of the Malu River Coalfield are as high as 8.6 billion to 9.5 billion tons, about half of them are buried for more than 1200 meters and cannot be mined. Only about 4 billion tons above 900 meters are suitable for NI43-101 resource development standards.
All coal mines in British Columbia, Canada, except for a small coal mine on Vancouver Island that produces 500000 tons of coal annually, are open-pit mining. Open pit mining in the Rocky Mountains is definitely the “tip of the iceberg” of mining, and the scale will not be too large. It is also difficult to discover suitable coking coal mines for underground mining. Dehua International Mining Group has been researching and exploring thousands of kilometers from north to south along the Rocky Mountains in British Columbia, Canada for over a decade, but there are few main coking coal fields that are truly suitable for underground mining.
Looking at the main distribution areas of coking coal in the world, there is no huge growth potential in the future. Due to the scarce distribution of main coking coal, although there are a lot of rich nonferrous metals and other resources on the “the Belt and Road”, there are almost no scarce resources of high-quality main coking coal.
- Coking coal products are highly profitable
International coking coal enterprises are still profitable at present. The latest FOB contract price for Canadian high-quality coking coal in 2015 was $93 per ton of coal, with a historical high of $320. Even with a minimum of $93, equivalent to over $136 CAD, the cost is only $75 CAD, resulting in a gross profit of $61 CAD or $41 USD per ton of coal. The coking coal mines that announced their closure were not underground coal mines, but open-pit mines with exhausted resources or open-pit mines with extremely high stripping ratios.
Although over 80% of Chinese coal enterprises, including those producing coking coal, suffer losses, the reasons for these losses are complex and comprehensive. The reason why coking coal products themselves are profitable is that the production cost of coking coal is almost the same as that of electric coal, but the selling price of coking coal is more than twice that of electric coal. Electric coal can still survive, and the life of coking coal must be at least a moderately prosperous life.
However, some coking coal production enterprises are indeed struggling, with high costs and heavy burdens. There are about 6 million coal miners in China, with an average coal production of over 600 tons per person, which is 80% lower than India’s average of 1100 tons per person. In addition, the self owned capital of Chinese coking coal enterprises is too low, and they mostly rely on huge high interest bank loans to maintain their operations. Moreover, coking coal production enterprises are operating with many non-performing assets, requiring profits from coking coal products to make up for losses.
- Coking coal faces severe shortage
Coking coal is used to sinter coke, with 90% of the coke used for iron ore smelting and steel production, and 10% used for non-ferrous metal smelting and casting, as well as the processing and production of steel, calcium carbide, and ferroalloys. Coking coal is the food for steel, and steel is the backbone of the country.
The world’s steel production represents a country’s level of modernization and strength. Britain, the United States, Japan, and the Soviet Union have all been the world’s steel leaders, with the United States holding the position for over 80 years, resulting in a scrap steel inventory of over 12 billion tons in American society. By relying on recycled scrap steel, it can basically meet domestic demand without the need to smelt steel from iron ore. China’s steel production capacity only exceeded 100 million tons per year in the early 1990s, and then rapidly developed to around 1 billion tons.
According to current technology, 1.4 tons of coking coal produce one ton of coke, and 0.4 to 0.6 tons of coke produce one ton of steel, which means that producing one ton of steel requires 0.56 to 0.84 tons of coking coal. According to the average yield of 50% for clean coal in China, producing one ton of steel requires mining 1.12 to 1.68 tons of coking coal raw coal. If China produces 700 million tons of crude steel, it will need to mine 784 million to 1.176 billion tons of coking coal annually.
The peak annual import of coking coal in China is close to 200 million tons. In 2014, despite a severe surplus of coking coal domestically, 68 million tons of coking coal were still imported, including 6.8 million tons from Canada. China’s high-quality main coking coal is in short supply, which is why although there is an excess of coking coal in China, it still needs to be imported.
The limit of human development is very distant, and if the limit is not reached, the growth of demand will not stop. Although China is already an economic powerhouse, its GDP is two-thirds of the world average and one seventh of that of the United States. China has 2856 counties, each with a population ranging from tens of thousands to millions, but the vast majority of counties do not even have a swimming pool. The population of Lvliang City in Shanxi Province is over 3.7 million, which is even larger than the population of British Columbia, Canada. The coal economy is particularly developed, and even this urban area currently does not have a swimming pool.
Most Chinese people live in houses with low level of earthquake resistance. The modernization of more than 40000 villages and towns still needs to be upgraded. Only 2% of Chinese people own private cars. In particular, the future national defense construction and the implementation of the “the Belt and Road” national strategy need huge steel support.
India will be the next China with decades of strong demand for primary coking coal. There are still many ‘Indians’ in the world competing to catch up with modern infrastructure and living standards. Statistics show that in 2014, the import of coking coal increased by 3.9% in Türkiye, 50% in Romania, 23.4% in Eastern Europe, 22.2% in Argentina and 8.3% in Brazil. Looking at the world, another wave of infrastructure construction is gradually taking shape, and from 2015 to 2035, the world’s energy demand will increase by about 40%.
Therefore, although the peak of world steel production has passed, the sustained low growth and medium high demand for steel will become the norm. Today, despite the dual overcapacity of steel production capacity and coal production capacity leading to widespread famine in the mining market, the scarcity and irreplaceability of coking coal make the era of the world’s coking coal famine, which is the “food” for steel, inevitable. Moreover, it is not far away, and the price will soar, possibly breaking the historical record of $320 per ton of coal.
- Suggestions for future development
Overcapacity is not resource surplus. The other side of overcapacity is resource waste, with backup resources rapidly depleting. It is difficult to find high-quality coking coal fields with reserves exceeding 100 million tons throughout China. Many large-scale coal production enterprises have significantly shortened the service life of their mines due to exceeding their original design capacity. At the same time as China’s overcapacity in coal production, mines will face resource depletion. Human impatience and shortsightedness have erupted in today’s coal production field, turning a blind eye to tomorrow’s energy crisis.
One of the biggest problems with state-owned enterprises is that their future has nothing to do with today’s managers. As a result, China’s limited coal resources have been infinitely developed and released, leading to serious overcapacity, severe supply-demand imbalance, and a chain reaction of coal enterprises operating in dire straits, causing serious impacts and even crises on China’s environmental ecology and energy security.
The supply and demand relationship of high-quality coking coal will undergo a reversal in the next 5 years, gradually transitioning from a buyer’s market to a seller’s market. If the supply-demand relationship deviates by 5%, it will lead to a surge in prices, and the era of severe shortage of main coking coal is not far away.
China will inevitably continue to require a large amount of mineral resources in the process of industrialization and modernization. The development of mineral resources will inevitably cause pressure or damage to the environment and ecology such as air, soil, water systems, and vegetation. Moreover, with the increasing intensity of mineral resource development and the deep integration of the global economy, China needs to globally allocate mineral resources. Only by mastering sufficient high-quality scarce resources can we have the right to speak and even survive in tomorrow’s world. This should not only be a corporate strategy, but also a national strategy. However, Chinese state-owned coal mining enterprises are large but not strong, and there are other reasons for the situation. Currently, there is no strength or intention to consider overseas resource layout.
Be prepared for the future, the top-level designers of the Chinese government should have a far sighted vision. On the one hand, they should protect and utilize scarce coal types such as coking coal and smokeless coal domestically, and on the other hand, support coal and steel enterprises to seize opportunities and carry out international resource allocation and layout. As for some so-called ‘failure cases’ of overseas mining investment, the vast majority are actually’ growing pains’, so there is no need to worry too much. At the time of writing this article, it happened to be the 66th anniversary of the founding of the People’s Republic of China.
On October 1, 2015, the Minister of Environment and the Minister of Mines of British Columbia, Canada jointly signed and issued an environmental assessment approval certificate for the Moyuhe main coking coal mine to Huiyong Dehua Company. This is a coal mine founded by Chinese people, which will be put into operation in 2017 and will soon contribute about 5 million tons of coking coal products to the international coking coal market. This debunks the so-called Canadian government’s opposition to Chinese coal mining by experts and scholars who rely on hearsay and speculation, and also allows media tools that demonize the overseas investment environment to re evaluate today’s international investment environment.