Will China light a fire under coal price?

China’s status as a coal exporter is slipping away, and with it another layer of the country’s energy security blanket.

Beijing has taken heed. Plans for what is effectively a strategic coal reserve are emerging. The country’s economic planning agency has asked state-owned China Shenhua Energy to build 10 coal-storage sites across China.

The trend also is providing more stimulus for Chinese efforts to snap up resource companies overseas, thereby ensuring supply — witness last week’s bid by Yanzhou Coal Mining for Australian miner Felix Resources.
Longer-term trends still suggest China is heading toward becoming a net importer of coal. Even though the country has substantial reserves — enough to meet its needs for another four decades, according to data from BP — demand is outstripping supply. It would need a marked acceleration in extraction to keep up with demands from China’s growing economy.

Coal provides 70% of the country’s energy needs. Analysts say the quality of China’s domestic coal also is slipping compared with that found, say, in Australia. And Chinese coal mines, mostly in the north, are often located far from big users of energy in the south. Importing coal by sea is thus often easier and cheaper.

Improvements in China’s transportation infrastructure could offset that trend. The country could invest more in accelerating coal extraction. And there is even a chance China’s longer-term need to improve the quality of its environment may see it reduce the use of “dirty” coal for energy.

But that all takes time. Meanwhile, virtually any globally traded commodity of which China becomes a net importer tends to rise in price. The impact on the coal market of China’s hunger also could be exacerbated by demand from another emerging giant, India.

Wall Street Journal (through Google News)