The following article appeared in today’s Fairfax newspapers in Australia. Written by their Beijing correspondent John Garnaut, it gives an excellent expose of the problems confronting China.
Although AZ China’s brief is about aluminium and the carbon market, particularly petroleum coke, one has to understand the dynamics of China’s coal and energy supply situation in order to understand the future for all related industries. China’s ability to produce energy will be a deciding factor in its continued GDP growth. It will also help frame government policy related to the growth of the aluminium industry here. To the extent that smelter growth is limited or encouraged, will determine the amount of raw materials available for the rest of the world, and may engender new opportunities for importers, just as coal has done this year. This article doesn’t mention it, but the World Bank has been working with the Chinese Government for almost 10 years on a coal mine modernisation program.
I for one do not believe for a minute that China’s strategy in coal has anything to do with safety. China desperately needs coal mining productivity and efficiency to improve, since coal is the heart of China’s energy production, and energy is at the heart of GDP. Without exploration, development, mining efficiency, power produciton efficiency and even a national grid, China’s long-term growth prospects are on thin ice.
THE people of Shanxi, a province famous in China for its deadly coalmines and toxic air, have had enough.
“We don’t want blood-tainted GDP,” says Fu Sufen, a mother and taxi driver in the provincial capital, Taiyuan.
One statistic that China failed to mention in this week’s 60th anniversary celebrations is that more than 250,000 workers have died in coalmines since 1949.
Shanxi has produced far more coal, and coalmining deaths, than anywhere else.
The worst of the disasters, when 682 people died in an accident in 1960, was classified as a state secret and was not disclosed until 1998. The regular gas explosions, mine-shaft floods, cave-ins and generally Dickensian work conditions have undermined Shanxi’s standing on the national stage, along with China’s claims to being a civilised nation.
Over the past decade Beijing has repeatedly launched mine-safety campaigns but they have mostly subsided beneath layers of corruption and collusion.
But that all changed dramatically a year ago when, after yet another Shanxi mine disaster, China’s top leadership signalled it had also had enough blood-tainted GDP.
Provincial governor Meng Xuelong was sacked and replaced with Wang Jun, then director of the State Administration of Work Safety.
In a year, he has upended the province’s priorities. Mine deaths have plummeted. But so has coal production and Shanxi’s economy.
In the first half of this year Shanxi slipped from first to fourth place on the national mine death list, with 132 fatalities.
The reduction helped pull down the national death toll to 1175 for the half-year, down 15 per cent on the previous year. Last year 3200 people were killed in China’s coalmines – less than half the 7000 fatalities recorded in 2003.
The cost of Shanxi’s sudden safety drive is that it was the only province to report that its economy contracted in the first half of this year – by 4.4 per cent from a year earlier – while China grew 7 per cent.
Shanxi coal production fell by 150 million tonnes in the first half compared with the previous year, according to Huadian Power International Corp president Chen Jianhua. This reduction was almost as large as Australia’s entire coal output for the period.
Shanxi’s safety-induced coal shortfall created an opening for Australian coal exporters for the first time in China’s history.
In the seven months to July, Australia’s thermal coal (for power generation) exports to China reached 8.8 million tonnes from a virtual standing start – up 986 per cent from the previous year.
Coking coal, the harder and more valuable variety used to make steel, reached 12.2 million tonnes in the first half, up 1403 per cent.
The unexpected opening in China has offset a collapse in Australia’s biggest coal export markets in Japan, Korea and Taiwan.
At the macro level, it has cushioned Australia’s net exports and terms of trade. At the company level, Chinese exports have been the difference between record profits and disaster. Macarthur Coal – which sells pulverised coal injection (PCI) coal to steel mills – had not sold one shipment to China before this year. But in the six months to June, Chinese buyers soaked up half the 2.3 million tonnes the company sold.
Macarthur’s executive general manager of corporate development, Ian McAleese, says the safety-driven import surge was sustainable but he is no longer in a position to supply China because other markets in North-East Asia are surging back.
”We have not got the coal available to sell to China any more,” he says. ”Demand for coal will probably remain there for the time being, but the availability of coal may not.” Vicky Binns, an analyst at BHP Billiton, the world’s biggest coking coal producer, said China was on track to import 30 million tonnes of coking coal this year from just 1 million tonnes last year. “We see this trend continuing,” she said.
But other close observers have witnessed the cycles of official excitement, temporary mine closures and subsequent resurgence all too often.
One hundred kilometres west of Taiyuan is a county called Yuanping whose economy, like much of Shanxi province, runs almost exclusively on coal.
The big mines in the area are mostly run by a huge provincial government-owned company called Datong. In those large mine areas the towns are still caked with dust, the roads are clogged bumper to bumper with coal trucks and everything is relatively normal. The filthy air is about to get worse when Datong and power company Huaneng complete what will be Shanxi’s largest power plant.
But further up the barren valleys, where the private miners once ruled, it is a different story.
An old man squats in the dust of his mud-brick village and laments what the privately owned mines have done to his lifestyle.
“The spring-fed stream has dried up,” he says. “And I can no longer crop half my field because a huge fissure has opened up in the middle of it, which I cannot cross.”
His village used to own the mine until the private entrepreneurs arrived about five years ago. The coal bosses allow him to dig out coal for his own needs and provides electricity, but no other compensation.
“All the able-bodied workers in the village have all left because we’ve lost our only source of income,” he says. “We’ve petitioned the county and provincial governments many times, but nothing ever happened.”
In the past, he says, the mines shut down for short periods just before safety inspectors arrived and then opened up again after they departed. But this time he has become a little happier because the mine has stayed shut since late last year, which is when the former coal safety chief Wang Jun arrived as provincial governor.
The coal cart tracks are all rusted over and only a skeleton construction crew remains.
The prolonged mine closure has left the old man with a new trickle of stream water.
Back in Taiyuan, however, the former owner of one of the area’s mines under construction is furious.
“It’s like I buy this cup,” says the former mine boss, as he handles his tea Thermos. “It’s my cup, but now I’m told I’m not allowed to use it.”
The mine boss, who we will call Zhang, is accustomed to covering his philosophical bases. On one wall is a picture of nearly 1000 entrepreneurs at a private industry association meeting at the Great Hall of the People. On the opposite wall are dusty old photos of Marx, Engels, Lenin, Stalin and Mao.
Since 2006, Zhang’s private consortium has invested 70 million yuan ($A11.68 million) in the mountain mine, including about 30 million yuan to pay an upfront royalty on the underlying 15 million tonnes of coal reserves. He shows us an old document from the provincial coal industry bureau giving permission to start mining in December this year.
But last December, the Government told him to suspend his project. And on May 14 the Shanxi Government issued an edict that all mines producing less than 900,000 tonnes would be closed, merged or taken over, reducing the number of coalmines from 2600 to 1000 by next year.
By 2012, it said, the production threshold would be increased to 1.2 million tonnes and the number of mines reduced to 800 by 2012.
The edict listed seven large state-owned mines as eligible to make the acquisitions.
Zhang was told he would be bought out by Datong, the local coalmining giant, on terms that he could not negotiate.
“Whether you merge is not up to you, it’s totally forced under threat of closure,” he says.
Last month, Zhang and hundreds of other “coal bosses” finally accepted that this policy was not for changing. He sold out to a consortium of Wenzhou coal bosses who owned three mines in the same area as his, and who bundled the four mines to sell to Datong.
The Wenzhou consortium will take 49 per cent, with the promise of an undetermined quantum of compensation from Datong at an unknown date.
“I sold for 50 million yuan, I’ve invested 70 million but the market value of my mine is 600 million,” says Zhang.
“In foreign countries people abide by the law but in China things are done according to red-heading documents,” he says, referring to the form of Chinese administrative edicts.
In his view, China is lurching away from the entrepreneurial dynamism embodied in the photo above his desk and back towards its stodgy Leninist past.
Shanxi’s coal bosses are widely maligned as the evil symbol of Dickensian China. According to the ubiquitous stereotype, they drive stretch limousines, sprinkling wads of cash in front of greedy officials and vanish into thin air when their mines collapse and kill their workers. But now, it seems, they are an endangered species.
Another Shanxi coal boss – we’ll call him Huang – has invested 40 million yuan in a mine in Linshi County, producing 150,000 tonnes a year. He is still operating but says he will be closed within two months. “It’s not even possible to bribe officials now,” he says. “Of 96 mines in the county, only 36 are still operating and production has been cut by half.”
Two weeks ago, one of China’s most dynamic newspapers ran a cover story headed “A World Without Coal Bosses”.
“The group of people who embodies ‘getting rich quick’ in China is now experiencing a turn around from heaven to hell,” it said.
The Southern Weekend article, based on two weeks of interviews in Shanxi, concluded that “the coal boss will retreat from history’s stage” – while adding that a few private bosses would yet make it to the big league with the help of official connections and “car boots filled with euros”.
Few in China will mourn the departure of the Shanxi coal boss. But there are also respected voices within the media, academia and government who warn that Governor Wang Jun is making a grave mistake. They say China’s direction is at stake.
One official, a representative at the Taiyuan City People’s Congress, said he had heard Governor Wang Jun advocating “guo jin min tui” – “advance of the state and retreat of private enterprise”.
He says Wang Jun has confused objectives so that eliminating private coal bosses has become an end in itself, rather than improving safety.
“State-owned enterprises are raping private enterprise,” he says.
“The Government is ignoring the law and violating human rights when it should be enforcing industry safety standards and developing a proper system of inspection.”
He predicts that by next year Shanxi will rebound to 700 million tonnes of coal – above last year’s 650 million tonnes – and only the shareholding structures, not the safety records, of Shanxi’s small mines will have changed.
It is noteworthy that the worst coalmining disaster in Shanxi this year was at a large, state-owned mine.
Few in Shanxi are game to voice their opinions publicly. But some have done so from the safety of distant provinces.
“Some coal bosses cannot prove they obtained their mines through legal means,” wrote Ye Tan, a respected finance commentator, in last week’s Southern Weekend.
But she warns that “depriving thieves” can quickly evolve to “depriving the disloyal”.
“We have seen the consequences of such social turmoil in the past,” she wrote. “If nationalisation is the answer, then it means the past 30 years of reforms have failed.”