Coal Surge Seen by Mobius as China's Imports Increase (Update2) 

By Michele Batchelor and Leony Aurora

April 16 (Bloomberg) -- Coal is poised to rebound from a two-year slump as 
China buys more than it exports for the first time in history. 

Power use in China, the world's biggest coal producer, is rising 13 percent 
annually, and utilities are building plants at a record pace. The nation gets 
78 percent of its electricity from coal, spurring imports from Australia, 
Indonesia and Vietnam. 

``The coal sector in China has undergone a change,'' said Mark Mobius, who 
oversees $30 billion at Templeton Asset Management Ltd. in Singapore. Mobius 
says Asian coal prices may surge 42 percent in five years, boosting China 
Shenhua Energy Co., the biggest coal company, China Coal Energy Co. and Yanzhou 
Coal Mining Co. 

Rising prices for the biggest fossil fuel after oil would drive power costs 
higher from Tokyo to London and benefit mining companies Xstrata Plc, Rio Tinto 
Group and BHP Billiton Ltd. Consumers such as Tokyo Electric Power Co. and RWE 
AG of Germany will pay more, hurting profit. 

Annual coal contract prices in Asia may surpass all-time highs in the next 12 
months. Deutsche Bank AG analysts led by Peter Richardson in Melbourne predict 
$58 a metric ton next year and $59.50 in 2009, from about $55.50 for the year 
that started April 1. New York-based Goldman Sachs Group Inc. expects $56 next 
year. 

Newcastle Shipments 

Coal last traded at $54.50 a ton for shipments from Newcastle, Australia, down 
16 percent from a peak of $63.10 in June 2004, according to the McCloskey Group 
Ltd., a coal consulting company in Hampshire, England. 

Goldman Sachs, the world's biggest securities firm by market value, forecasts 
that higher coal prices will cause a 22 percent gain in the shares of Xstrata, 
based in Zug, Switzerland, the world's largest exporter of coal used in power 
plants. The stock may rise to 33.65 pounds ($66.87) from 27.66 pounds as of 
last week, Goldman Sachs analysts say. 

Costs for shipping bulk commodities already are rising because of coal. At 
Newcastle, Australia, the world's biggest coal-loading port, a record 71 
vessels sit offshore waiting to load because producers can't fill the orders 
fast enough. 

The Baltic Dry Index, the benchmark for commodity-shipping costs, has risen 26 
percent this year to 5553, following an 80 percent surge in 2006 on London's 
Baltic Exchange. 

China's Power 

China, which mines more than twice as much coal as the U.S., the next biggest 
producer, uses the fuel to generate 622 gigawatts of electricity. Plants built 
in China in the last year alone generate enough power to supply the U.K. 

Si Posen, an expert at the China Coal Information Institute, said the Chinese 
never had to look outside the country for the fuel since 10,000 years ago at 
the time of the New Stone Age, or Neolithic Era. 

``People in Shanxi, now the largest coal production base, have been burning 
coal as fuel since then,'' Posen said in a telephone interview from Beijing. 
``China had been self- sufficient since it started producing coal.'' 

The government's closure of unsafe and illegal mines that killed 5,986 workers 
in 2005, or more than 16 people every day, is adding to the pressure on coal 
prices. Regulators shut 8,300 in the two years through 2006 and plan another 
1,700 shutdowns by year-end, Li Yizhong, vice minister of state administration 
of work safety, said at the China Coaltrans Conference in Beijing today. 

Imports Increase 

China's purchases of coal in January exceeded exports by 1.4 million tons, the 
first time that happened, data from the Beijing-based General Administration of 
Customs show. While the trend reversed in February, the impetus for imports to 
rise is unstoppable. By 2010, demand may reach 2.6 billion tons, 270 million 
tons more than last year's output, the government said. 

``We have been forecasting that China's exports will fall, and it has come to 
that, even more rapidly than we expected,'' said Clyde Henderson, a coal 
analyst at Energy Economics Pty in Sydney. 

Any turnaround to net purchases this year would come three years sooner than 
predicted by the Australian Bureau of Agricultural and Resource Economics, the 
government forecaster in the world's second-biggest exporter of thermal coal. 
Datang International Power Generation Co., the second-largest Chinese power 
producer with a Hong Kong stock-exchange listing, is among the buyers. 

``Coal imports will account for about 10 percent of our total demand,'' said 
Bai Fugui, fuel procurement manager at Beijing-based Datang. Datang's 
generators burn about 60 million tons a year, more than is used in the U.K., 
Europe's second- largest economy. He said he's buying coal from Indonesia and 
Vietnam this year. 

Asian Prices 

The increase in China's imports will help lift prices in Europe by forcing 
consumers to buy more from South Africa and Russia. Coal prices in Europe have 
risen to about $70 a ton from around $52 at the end of 2005, according to 
McCloskey Group. 

U.S. buyers will be insulated from higher prices by the nation's own supplies, 
said Richard Price, president of Westminster Securities Corp., a St. 
Louis-based investment bank. 

``China's net exports have been declining and can be expected to further 
decline, offset by Indonesian, Australian and Vietnamese imports, but not any 
significant volume of U.S. exports,'' he said. U.S. eastern coal prices have 
fallen to around $41 a ton from $57 at the end of 2005, according to data 
compiled by Bloomberg. 

Last month, China Shenhua of Beijing said it will start buying Indonesian coal 
because it's cheaper than shipments sent along China's coast. Prices may rise 
``gradually'' in the next few years before gaining ``drastically,'' Shenhua 
Chairman Chen Biting told reporters in Hong Kong March 26. 

Mobius's Call 

Shenhua will produce 400 million tons of the fuel by 2010, almost double last 
year's total, President Ling Wen said in Beijing today. 

Shenhua shares on the Hong Kong stock exchange have risen 50 percent in the 
past year to HK$19.78, more than the 26 percent gain in the benchmark Hang Seng 
index. 

By 2012, according to Templeton's Mobius, prices may reach $78, surpassing the 
record $63.10-a-ton spot price on June 25, 2004, when shortages prompted China 
to restrict exports. 

``The prospect of China being a net importer of thermal coal as early as 2008 
has placed material upward pressure on the outlook,'' Deutsche Bank, Europe's 
biggest investment bank by revenue, said in its report. The outlook ``has 
improved significantly.'' 

Indonesia, the world's biggest exporter of coal, is increasing output to 
respond to demand and higher prices. In February, Indonesia accounted for 41 
percent of Chinese imports. 

Insufficient Supply 

``China and India are both very active in looking for coal here, and people are 
getting greedy,'' Jeffrey Mulyono, head of the Jakarta-based coal mining 
association in Indonesia, said in an interview April 4. ``They want to take any 
type of coal.'' 

Mulyono said Indonesia will boost exports 11.4 percent to 165 million tons this 
year, from 148 million in 2006. 

Asian power generators will increase coal orders by more than 300 million tons 
in the next three to four years because of economic growth, said Nalinkant 
Rathod, commissioner at Jakarta- based PT Bumi Resources, Asia's third-largest 
coal miner. China will raise consumption by at least 200 million tons, he said. 
China's gross domestic product grew 10.4 percent in 2006, the fastest among 
major economies. 

``That creates a gap in the supply position as demand is very large but supply 
is not very encouraging,'' Rathod said on April 4. Prices will ``spike when 
people can't fill the gaps.'' 

Bumi, Indonesia's biggest coal exporter to power plants, forecasts shipments to 
China will double to 2 million tons this year, Dileep Srivastava, head of 
investor relations, said in an e-mail on April 9. 

``There have been so many calls from China, seeking contracts to get coal from 
us,'' Bob Kamandanu, president director of PT Berau Coal of Jakarta, 
Indonesia's fifth-largest producer, said in a phone interview April 9. ``We 
have contracts to supply about 1.5 million tons of coal a year to China and 
expect this to double within three years.'' 

To contact the reporters of this story: Michele Batchelor in Beijing at [EMAIL 
PROTECTED] ; Leony Aurora in Jakarta at [EMAIL PROTECTED] . 

Last Updated: April 16, 2007 02:13 EDT 

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