By Ryan Landon Swanson
Despite China’s (NYSEARCA:FXI) tripling of its solar (NYSEARCA:TAN) power capacity last year and impressive expansions in wind (NYSEARCA:FAN) and hydropower, China’s consumption of coal (NYSEARCA:KOL) is still growing, worrying environmentalists about climate change and acid rain. Coal (NYSEARCA:KOL) has fueled China’s rapid industrialization since the reform and opening of China’s economy in 1978, culminating in a doubling of China’s domestic coal production over the past decade. Less obvious is that China’s coal imports have increased by a factor of 60 over the last decade, as China has diversified its coal procurement to other countries. Furthermore, with all the talk of China and renewables (NYSEARCA:GEX), it is easy to forget that well-respected forecasts still predict that coal will dominate China’s energy economy (NYSEARCA:CHIE) for decades to come. Indeed, king coal is far from being dethroned.
In 2010, China accounted for nearly half of global coal consumption, consuming three times that of the US, the world’s second largest coal consumer. Historically abundant and cheap, coal has come to power nearly 80 percent of China‘s electricity generation, and coking coal—used in iron and steel production—enabled China to become a significant net exporter of steel in 2006. However, China‘s once abundant coal (NYSEARCA:KOL) reserves are now waning. At the end of 2007, China’s ratio of total coal reserves to annual production was 45 to 1 and by the end of 2010 that ratio dropped to 35 to 1—meaning that at 2010 rates of extraction China‘s coal reserves would run out in 35 years. Surely, three and a half decades worth of reserves is not a resource crisis, but as China’s energy demand surges to new heights—including 7 percent growth in 2011—China‘s reliance on coal will continue to diminish this ratio and further reduce the resource’s remaining lifespan, thereby threatening the stability of China‘s electricity supply and steel production.
China’s rapidly growing coal imports will help ease pressure on domestic production, but there are also other reasons why China (NYSEARCA:FXI) would prefer to import coal. In a report published last month, Kevin Tu, a senior associate in the Carnegie Energy and Climate Program, examined China’s recent shift toward coal imports and explained why China would want to diversify its coal suppliers. First, transportation bottlenecks have frustrated the transport of coal from mines in northern and western provinces to the industrial centers along the southeastern seaboard, resulting in the saturation of China’s railway and highway infrastructure. Although China‘s railway system is expanding, it has lagged the growth of coal production (NYSEARCA:KOL), sometimes leading to shortages of supply and rising coal prices across the country.
Second, coal imports could help to meet local environmental goals, as China could close dangerous, small coal mines that have been difficult to regulate for environmental standards. Furthermore, by ‘exporting’ the dirty production processes to other countries, China could reduce its coal-related carbon footprint, giving it a more advantageous position in international climate change negotiations. Finally, Tu explains that, given the necessity of coking coal in steel production and China’s proportionally smaller reserves of coking coal, China can import coking coal from other countries in order to protect its domestic reserves from depletion. Indeed, coking coal made up 63 percent of total Australian coal exports to China in 2010, and Mongolia, endowed with rich coking reserves, has quickly emerged as a critical overland coal supplier.