Source: The Wall Street Journal Asia   Date: May 6, 2010

China's growing appetite for imported coal has lit a fire under coal prices and fueled deal making linked to the belief that the country, once a major exporter, will be a long-term buyer of foreign coal.

China's coal-importing binge started last year when international prices were low as a result of the recession while Beijing's stimulus spending kept domestic prices relatively high. With coal the primary fuel for China's economic engine, the buying is continuing even as global prices rise. China's coal imports in March jumped 165% from March 2009.

The country's growth amid the global economic rebound is already driving up a wide swath of commodities, including iron and oil. But so far—at least for coal—prices remain below the pre-recession highs of 2008. Still, in March, Goldman Sachs raised its estimates for global coal prices, with supplies of certain types of coal remaining tight through 2011 because there aren't a lot of new mines opening soon.

In a quarterly report, the China Electricity Council, an industry trade group, recently warned that demand for thermal coal used in power plants would remain high for the rest of this year because of strong growth and supply constraints. More than 70% of China's electricity comes from coal-fired power plants, and the country's power-generating capacity is expected to expand 10% this year.

The surge in Chinese demand is prompting acquisitions. Last year, Chinese miner Yanzhou Coal Mining Co. bought Australia's Felix Resources Ltd. for USD3.2 billion. St. Louis-based Peabody Energy Corp., meanwhile, is trying to buy Australia's biggest coal exporter, Macarthur Coal Ltd.

For decades, China was a net exporter of coal, selling some 83 million metric tons more than it bought internationally in 2003. By 2007, that had started to change, with China recording net imports in some months, a development that helped to send global coal prices to records. But last year trade swung dramatically, with China importing nearly 126 million metric tons and exporting just 22 million.

China swallowed more than a fifth of the 600 million tons of total seaborne-coal trade last year, jolting the global coal business at a time when steel mills and power plants elsewhere were sidelined by recession. The trend has continued this year, with coal imports in the first three months of 2010 jumping 226% from a year earlier to 44.4 million tons. That is a fraction of China's consumption, which amounted to 1.4 billion tons of coal in 2008.

Suppliers are scrambling to keep up. Peabody Energy estimates that Asia will add enough power plants in the next three years to burn the equivalent of a billion more tons of coal annually, with most of that demand from China. China has some of the world's biggest reserves of low-quality thermal coal, but such coal tends to have higher levels of pollutants like sulfur. The newer, cleaner power plants being built require better grades of coal. And many of those plants are on the coast, where it can be less expensive to buy seaborne coal than to bring it by rail from China's remote inland regions.

China also has inadequate domestic supplies of higher-grade coking coal, which is a key ingredient for making the steel that feeds the country's booming construction industry. Coking coal and other types of coal used to make steel, known as metallurgical coal, accounted for 27% of China's coal imports in 2009, up from 16% in 2008.