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INDUSTRY OVERVIEW
The information presented in this section is derived from various official government publications, industry sources such as industry publication, and survey or studies conducted by Fenwei, an Independent Third Party. We believe that the sources of such information are appropriate sources and we have taken reasonable care in extracting and reproducing such information. We have no reason to believe that such information is false or misleading in any material respect or that any fact has been omitted that would render such information false or misleading in any material respect. Our Directors confirm, after taking reasonable care, that there is no adverse change in the market information since the date of Fenwei Report which may qualify, contradict with or have an impact on the information in this section. However, the information has not been independently verified by us or the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED], the [REDACTED] or any of their respective Directors, officers or representatives or any other party involving in the [REDACTED], and no representation is given as to its accuracy, completeness or fairness. Accordingly, you should not place undue reliance on such information or statistics.
SOURCE OF INFORMATION
We have commissioned Fenwei, an independent market research company, to conduct an analysis and prepare a report on the anthracite coal industry in Guizhou and China, as well as the CBM industry and the active charcoal industry in China. Fenwei was established in 1998 as a consultancy firm on the coal industry of China and is an Independent Third Party. Fenwei has extensive experience in the industry and has provided industry opinions to over 100 coal mining enterprises. Fenwei charges RMB350,000 for the provision of the above services. In order to ensure the accuracy of the analysis made to the said industries and markets, methods used by Fenwei to collect data for analysis include: (a) desktop research, including gathering second-hand data from government statistic, periodicals and financial reports; (b) field research by visiting and interviewing competent government authorities, industry associations, relevant industry experts, coal mine operators and downstream users; and (c) database, forecast models of supply, demand and price developed exclusively by Fenwei. All data or information sourced from Fenwei are not statistical data from government authorities. Fenwei obtained such data by calculation, collation and investigation based on publicly available data.
In compiling and preparing the Fenwei Report, certain assumptions are adopted by Fenwei, including (a) the economy of China will not undergo a sharp decline; (b) the major market driving forces will continue to influence the coal market in the next five years; and (c) no significant technical changes will appear in downstream coal sectors in the next five years which may dramatically curtail coal demand.
Certain information in the Fenwei Report is disclosed in this document. Unless otherwise specified, all the industry data presented in this document have been based on or derived from the Fenwei Report. Fenwei has given consent to us in making reference to its industry report and in using the information contained in its report in whole or part in this document.
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INDUSTRY OVERVIEW
ANTHRACITE COAL
According to the Chinese Coal Classification Standard, coal is generally categorized into lignite coal (褐煤), bituminous coal (煙煤) and anthracite coal (無煙煤) based on their physical and chemical properties and end uses. Lignite coal and bituminous coal are low-rank coals. They feature low calorific value due to high moisture content and low carbon content. Anthracite coal is top-rank coal with volatile matter content (Vdaf) not exceeding 10.0%. It generally has high calorific value due to low moisture content and high carbon content.
Figure1: Chinese Coal Classification
Anthracite Coal Bituminous Coal Lignite Coal (Vdaf≤10%) (Vdaf>10-37%) (Vdaf>37%, Ogr.maf≤24MJ)
Source: Chinese Coal Classification Standard
Use of Anthracite Coal
Anthracite coal has a wide range of applications in chemical production, power generation, cement production, sintering, smelting and injection in steel plants and other civilian purposes. China’s anthracite coal products can be divided into chemical lump anthracite coal and fine anthracite coal. The specific use of different types of coal are set out below:
Lumpiness of Types of Coal Industrial use Anthracite Coal Quality requirements
Chemical Coal Chemical Lump coal Low ash, high fixed carbon content, (≥13mm) thermal stability and anti-crushing strength PCI Coal Metallurgy Fine coal (<13mm) High grindability, low harmful content, high threshold for ash content and sulphur content Thermal Coal Power Generation Fine coal (<13mm) High calorific value and ash fusibility, relatively lower requirement on other indicators such as ash content and sulphur content Thermal Coal Building materials Fine coal (<13mm) High calorific value and ash (such as concrete fusibility, relatively lower and glass requirement on other indicators such production) as ash content and sulphur content
Source: Fenwei Report
Anthracite coal is unlikely to be completely replaced by other coal products due to technological limitations and the shortcomings in using low rank coal. As such, anthracite coal will continue to account for a relatively high share in both the chemical industry and the PCI coal market.
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INDUSTRY OVERVIEW
OVERVIEW OF THE ANTHRACITE COAL INDUSTRY IN CHINA
Distribution of Anthracite Coal Resource Reserve in China
According to the Ministry of Land and Resources (“MRL”) and the State Administration of Work Safety (“SAWS”), as of the end of 2014, China had 146.2 billion tonnes of anthracite coal, accounting for only 10% of coal in China. China’s measured resource reserve of anthracite coal are mainly located in Shanxi Province and Guizhou Province where the resource reserve together accounted for 70% of China’s total reserves.
The Supply of Anthracite Coal in China
China’s anthracite coal production is mainly located in Shanxi, Guizhou, and Henan Provinces. Shanxi Province is the largest anthracite coal producer in China, accounting for 42% of the raw anthracite coal production volume in 2015. Guizhou Province is the second largest anthracite coal producer in China. It produces around 55 Mt of commercial coal in 2015, accounting for around 15% of China’s commercial anthracite coal production volume. China has also imported anthracite coal from other countries, including Russia, North Korea and Vietnam. China’s total net import in 2015 is 21.7 Mt.
China’s anthracite coal production volume has declined since 2012. China’s commercial anthracite coal production volume had maintained a CAGR of -6.3% between 2013 and 2015. Coal production volume in China is expected to decrease at CAGR of -0.3% from 2016 to 2020.
Demand of Anthracite Coal in China
China’s total consumption of anthracite coal continued to decrease during the period from 2013 to 2015, and is expected to decrease at a CAGR -0.7% between 2016 to 2020 in China. The following table sets forth a breakdown of anthracite coal demand and supply by industry and by coal type.
CAGR
2013- 2016- 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015 2020
Commercial anthracite coal production (Mt) 413.2 392.5 362.8 363.2 361.5 354.6 362.3 359.2 -6.3% -0.3% Chemical lump anthracite production (Mt) 86.9 81.6 74.5 74.2 73.5 71.7 72.9 71.8 -7.4% -0.8% PCI anthracite production (Mt) 58.2 53.6 48.0 47.1 46.0 44.2 44.3 43.1 -9.2% -2.2% Thermal anthracite production (Mt) 267.7 257.1 240.3 241.9 242.0 238.6 245.1 244.2 -5.3% 0.2% Anthracite coal net imports from other countries (Mt) 37.1 28.0 21.7 19.8 18.2 18.7 13.3 12.6 -23.4% -10.6%
Anthracite coal demand 450.3 420.5 384.5 383.0 379.7 373.3 375.6 371.8 -7.6% -0.7% Chemical lump anthracite demand (Mt) 86.9 81.6 74.5 74.2 73.5 71.7 72.9 71.8 -7.4% -0.8% PCI anthracite demand (Mt) 70.1 62.7 55.4 53.8 53.7 53.9 53.9 52.5 -11.1% -0.6% Thermal anthracite demand (Mt) 292.9 276.0 254.6 255.0 252.5 247.7 248.8 247.4 -6.8% -0.7%
Source: Fenwei Report
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INDUSTRY OVERVIEW
OVERVIEW OF THE ANTHRACITE COAL INDUSTRY IN SOUTHWESTERN AND SOUTHERN CHINA
Distribution of Anthracite Coal Resource Reserve in Southwestern and Southern China
According to the MRL and the SAWS, as of 31 December 2014, Guizhou Province had approximately 57.4 billion tonnes of measured resource reserve of coal, of which 70% was anthracite coal. The anthracite coal resource reserve in the Guizhou Province accounts for 28% of measured resource in China. The combined proved anthracite coal resource reserve in other provinces in Southwestern and Southern China were 13.8 billion tonnes, which account for 9.4% of China’s total anthracite coal reserve.
The coal-rich regions in Guizhou Province are concentrated in four cities: Liupanshui, Bijie, Qianxinan and Zunyi. The anthracite coal in the Bijie region has high calorific value, low sulphur, low ash content, and low grindability. Coal produced in this region can be used in the chemical industry, in the metallurgy industry and for power generation.
Coal Transportation in Guizhou Province
Guizhou is located in the southwest of China. Coal in Guizhou Province is transported by rail, road and waterway. According to the Fenwei Report, in 2015, the average transportation cost in Guizhou Province per tonne was RMB0.5 to RMB1.0 per kilometre by road, RMB0.3 per kilometre by rail, and RMB0.2 to RMB0.3 per kilometre by waterway.
Guizhou Province plays an important role in China’s transportation network. Guizhou Province’s road and railway network mainly consists of five national highways which lead to Guangxi, Sichuan, Yunnan and Hunan Provinces. The waterway network in Guizhou Province mainly consists of five outbound waterways which either lead to Yangtze River in the north or access to Pearl River in the south.
Currently, coal logistics of the Guizhou Province mainly involve railway and road transportations within Southwestern and Southern China. According to the “678” expressway network planning of Guizhou, by 2030, Guizhou’s expressway network is expected to connect with various expressways which would lead to Yunnan, Hangzhou, Chengdu and Xiamen and other provinces and cities from the Bijie region. In addition, with the development of Wujiang river transport, it will be more convenient and economical for water transport of coal resources from the Bijie region to other regions in the future.
Supply of Anthracite Coal in Southwestern and Southern China
There has been a strong supply of anthracite coal in Northern China, especially in Shanxi Province and Henan Province. In contrast, domestic anthracite coal production in Southwestern and Southern China is insufficient to meet its demand. Guizhou Province is currently the only province in Southwestern and Southern China with a net export of anthracite coal. Although Yunnan Province also used to be a major coal exporter prior to 2013, the supply from Yunnan has drastically declined due to serious mining accidents that occurred in 2014. In 2015, the neighbouring provinces and municipality of Guizhou, including Guangdong, Guangxi, Sichuan, Chongqing and Yunnan, have
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INDUSTRY OVERVIEW insufficient supply for its domestic demand. These provinces have to rely on anthracite coal imports from other provinces. Given the shortage of domestic supply in the region, the target market of Guizhou’s anthracite coal consists of Guizhou and its neighbouring provinces and municipality (i.e. Guangdong, Guangxi, Sichuan, Yunnan and Chongqing).
The combined effect of weakened market conditions and mining resource consolidation policies implemented by the central and local governments lead to the close-down of small-scaled coal mines and a decline in the number of coal mining enterprises. The commercial anthracite coal production has declined from 119.6 Mt in 2013 to 93.6 Mt in 2015. According to SAWS and Fenwei, anthracite coal production in Southwestern and Southern China is expected to continue to decrease. By 2020, commercial coal production in the region is expected to be 71.3 Mt, representing a CAGR at -5.0%.
The production volume in Guizhou Province decreased in the same manner as other provinces in the region, though it remains the largest anthracite producing province in Southwestern and Southern China. The commercial anthracite coal production volume in Guizhou Province in 2015 is 55 Mt, as compared to 61 Mt in 2013. The CAGR during this period is -5.2%.
Demand of Anthracite Coal in Southwestern and Southern China
Prior to 2013, rapid economic development of Southwestern and Southern China had brought about a growing demand for coal. However, due to the weakening of China’s economy, the overall demand for anthracite coal has decreased. The CAGR of anthracite coal consumption was at -6.8% from 2013 to 2015, and is expected to be -2.8% between 2016 and 2020.
Notwithstanding the above, due to China’s substantial reduction in coal production capacity, the decrease in supply is expected to be significantly greater than that in demand. The decline of production volume and demand for commercial coal between 2016 to 2020 is expected to be -5.0% and -2.8% respectively. By 2020, the shortage in supply of domestic anthracite coal in Southwestern and Southern China is expected to be 28.5 Mt.
According to Fenwei, by 2020 the chemical industry is expected to account for a higher proportion of anthracite coal consumption. The demand of total anthracite coal from the chemical industry in Southwestern and Southern China is expected to increase from 22.2% in 2016 to 24.8% in 2020. Set forth below is a breakdown of the supply and demand of anthracite coal in Southwestern and Southern China.
CAGR
2013- 2016- 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2015 2020
Commercial anthracite coal production (Mt) 119.6 99.6 93.6 87.6 87.7 84.0 79.8 71.3 -11.5% -5.0% Chemical lump anthracite production (Mt) 29.3 24.0 23.9 22.2 22.0 20.9 19.7 17.4 -9.6% -5.9% PCI anthracite production (Mt) 8.3 6.0 5.6 5.2 5.0 4.7 4.3 3.8 -17.9% -7.6% Thermal anthracite production (Mt) 82.0 69.6 64.1 60.2 60.7 58.4 55.8 50.1 -11.6% -4.5% Anthracite coal net imports (Mt) 13.8 26.9 22.2 24.4 21.4 22.1 23.4 28.5 26.9% 4.0%
Anthracite coal demand 133.4 126.6 115.8 112.0 109.1 106.1 103.2 99.8 -6.8% -2.8% Chemical lump anthracite demand (Mt) 25.2 25.5 25.0 24.9 25.0 24.9 24.9 24.8 -0.5% -0.1% PCI anthracite demand (Mt) 9.8 8.7 7.6 7.1 6.6 6.2 5.9 5.5 -11.6% -6.1% Thermal anthracite demand (Mt) 98.4 92.3 83.2 80.0 77.5 74.9 72.4 69.6 -8.1% -3.4%
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INDUSTRY OVERVIEW
PRICE OF ANTHRACITE COAL IN CHINA AND IN SOUTHWESTERN AND SOUTHERN CHINA
Price of Anthracite Coal in China
As China’s general economy slows down, the price of anthracite coal has declined. Below is the price of anthracite coal price trend from 2013 to March 2016, excluding VAT.
Figure 2 Mine-gate price of anthracite coal in China from 2013 to March 2016 (excluding VAT)
2013/1/21 2013/10/28 Chemical Big lump Chemical Medium Lump Chemical Clean coal PCI Fine coal 1049 2014/1/26 Themal Fine coal 968 887 1200 2014/9/1 2015/1/5 2015/12/28 939 1000 822 873 672 729 940 625 752 795 682 800 627 880 588 705 705 600 513 581 637 547 410 453 400 564 581 436
325 350 188 200
0 3 4 4 4 4 4 6 6
7/1/20137/3/20137/5/20137/7/201 7/9/2013 7/1/201 7/3/201 7/5/201 7/7/201 7/9/201 7/1/20157/3/20157/5/20157/7/20157/9/2015 7/1/201 7/3/201 7/11/2013 7/11/2014 7/11/2015
2013 2014 2015 2016 (Jan-Mar) Unit:RMB/t Ave Max Min Ave Max Min Ave Max Min Ave Max Min Chemical coal - Big lump (+120mm) 964 1049 887 776 939 672 675 729 625 619 625 572 - Medium lump (80-120mm) 892 968 822 723 873 627 633 682 588 583 589 539 - Clean coal (8-80mm) 840 940 752 658 795 581 592 637 547 539 547 496 PCI Fine coal (-8mm) 771 880 705 612 705 564 511 581 436 436 436 436 Thermal Fine coal (-8mm) 456 513 410 384 453 325 287 350 197 188 188 188
Source: Fenwei Report Notes:(1) Big lump refers to Yangquan big lump with total moisture 4%; ash 10%; volatile matter 6.5%; sulphur 0.9%; and CV 29.3MJ/kg NAR; (2) Medium lump refers to Yangquan medium lump with total moisture 3%; ash 11%; volatile matter <6.5%; sulphur <1%; and CV >29.3 MJ/kg NAR; (3) Clean coal refers to Yangquan small lump with total moisture 5.3%; ash 12 %; volatile matter 7%; sulphur <1%; and CV 28.9 MJ/kg NAR; (4) PCI fine coal refers to Yangquan PCI fine coal with total moisture 5.7%; ash <12.5%; volatile matter <8%; sulphur <1%; and CV >28.5 MJ/kg NAR; (5) Thermal fine coal refers to Yangquan fine coal with total moisture 4.7%，ash 28%; total moisture 5.6%; volatile matter 6%; sulphur <1%; and CV 23 MJ/kg The relevant sample coal products are obtained from mines located in the Shanxi Province, Yangquan region. Yangquan region is the largest anthracite coal production base in China. According to Fenwei, the prices of anthracite coal products produced from the region are reliable indicators of the general price of anthracite coal in Northern China as well as in China at large.
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INDUSTRY OVERVIEW
Price of Anthracite Coal in the Guizhou Province
The anthracite coal prices in the Guizhou Province decreased in the same manner as that in the rest of China.
Figure 3: Mine-gate price of anthracite coal in Guizhou region from 2013 to March 2016, (excluding VAT)
Chemical Big lump Chemical Medium Lump 2013/3/11 Chemical Clean coal Themal Fine coal 1150 PCI Fine coal
1050 1080 2014/1/6 950 889 2013/7/29 961 2014/8/18 2015/2/2 2015/12/28 850 798 889 803 883 750 794 719 752 782 675 650 838 658 697 624 550 650 709 645 650 581 427 585 607 450 436 470 376 372 385 350 291 250
/2014 /2014 /2014 /2014 /2014 /2015 /2016 /2016 1/2014 1/2015 14/1/201314/3/201314/5/201314/7/201314/9/2013 14/1 14/3 14/5 14/7 14/9 14/1/201514/3/201514/5/201514/7/201514/9 14/1 14/3 14/11/2013 14/1 14/1
2013 2014 2015 2016 (Jan-Mar) Unit:RMB/t Ave Max Min Ave Max Min Ave Max Min Ave Max Min Chemical coal - Big lump (+120mm) 945 1080 794 866 961 798 784 883 719 775 796 729 - Medium lump (80-120mm) 783 889 658 730 803 675 674 752 624 674 692 632 - Clean coal (8-80mm) 727 838 585 700 782 645 637 697 581 634 650 607 PCI Fine coal (-8mm) 738 889 650 648 709 607 576 650 470 470 470 470 Thermal Fine coal (-8mm) 405 427 376 402 436 372 329 385 291 281 282 274
Source: Fenwei Report Notes:(1) Big lump refers to Anshun big lump with total moisture 3%; ash 12%; volatile matter 7.5%; sulphur 0.9%; and CV 28.4 MJ/kg NAR; (2) Medium lump refers to Anshun medium lump with total moisture 3.5%; ash 11%; volatile matter <10%; sulphur 1%; and CV >29.3 MJ/kg NAR; (3) Clean coal refers to Jinsha small lump with total moisture 7.4%; ash 16-18 %; volatile matter 6.5%; sulphur 0.4%; and CV 27.6 MJ/kg NAR; (4) PCI fine coal refers to Zhijin PCI fine coal with total moisture 5.2%; ash <13.5%; volatile matter <10%; sulphur <0.8%; and CV >26.3 MJ/kg NAR; (5) Thermal fine coal refers to Anshun fine coal with total moisture 5.6%; ash 28%; volatile matter 6%; sulphur 0.4%; and CV 20.9MJ/kg
The quality of coal products produced in Anshun City, Jinsha County and Zhijin County is similar to that produced by our Company. The average prices of Anshun fine coal, Jinsha small lump, Anshun medium lump, Anshun big lump and Zhijin PCI correlate to the average price of our Company’s relevant coal products. For detailed discussion regarding the price trend of different products of our Group, please refer to “Financial Information — Description of Major Components of Results of Operations — Sales Volume and Average Selling Price”.
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INDUSTRY OVERVIEW
Expected Pricing Trend of Anthracite Coal in Southwestern and Southern China
Government policies, which aim to further reduce supply, including curbing capacity expansion, output growth and controlling overproduction, lead to a shortage of anthracite coal supply in Southwestern and Southern China. At the same time, the relevant authorities of the PRC government have implemented measures to restrict import and encourage export of coal. It is expected that China would continue to tighten quality inspections of imported coal in the near future. All these are expected to lead to a reduction of supply of anthracite coal in Southwestern and Southern China. Based on the above, Fenwei expects anthracite coal prices to remain stable and gradually increase from 2016 to 2020.
Fenwei’s pricing forecast is also based on the following assumptions:
• an inflation rate of 2% is assumed;
• cost-plus pricing is expected to be adopted;
• the use of anthracite coal for chemical plants is expected to experience growth in Southwestern and Southern China; and
• improvements in transportation conditions between Guizhou Province and its neighbouring provinces.
COMPETITION IN THE ANTHRACITE COAL INDUSTRY
In 2015, the designed production capacity of our Group represents 3.4% of the total anthracite production capacity in the Guizhou Province. Our Group is the sixth largest anthracite coal producer by volume in the Guizhou Province in 2015 as well as the largest private anthracite coal producer in the Guizhou Province.
The five largest anthracite production enterprises in Guizhou are state-owned enterprises (“SOE”). With advantages in both scale and sales network, they are our major competitors. SOE anthracite production enterprises sell their coal to both end users and trading companies. Private anthracite production enterprises, on the other hand, generally do not have the same bargaining power against end users. They usually sell their coal to trading companies, which would then on-sell the coal to end-users. Selling coal to trading companies allows private enterprises to obtain better payment terms. The credit term granted to trading companies are also likely to be shorter than that granted to end-users. In addition, selling to trading companies would lower the sales and administrative costs of anthracite coal mining enterprises as the trading companies would arrange transportation to end-users themselves without the involvement of the anthracite coal mining enterprises. Besides trading companies, private enterprises also sell coal products to individual customers who either on-sell to local residents for domestic use, or for their own domestic use (such as heating and cooking). Coal products sold to individual customers usually have a wide range of requirements on the quality of coal.
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INDUSTRY OVERVIEW
However, certain individual customers may also request high quality coal products for better heat production capacity and less acid smoke. As the quantity of coal products sold to individual customers are significantly smaller than that sold to trading companies, coal-mining companies can usually command a higher price.
The anthracite products produced by the five largest anthracite production enterprises are mostly thermal coal, while those of our Group are mostly chemical anthracite coal and PCI coal. The price of chemical lump anthracite coal and PCI coal is far higher than the price of thermal anthracite coal, but their costs of production are similar. This has increased the room of profitability of our Group. The information of our key competitors are set out below:
Designed anthracite Rank Group name capacity (Mt/a) 1 SOE A 7.05 2 SOE B 4.05 3 SOE C 2.55 4 SOE D 2.4 5 SOE E 2.4 6 Our Group 2.25 7 SOE F 2.25 8 Private enterprise G 2.22 9 Hong Kong listed private enterprise H 1.95 10 SOE I 1.8 Total designed production capacity of anthracite coal 66.8
Source: SAWF, Fenwei Report
Our Competitive Advantages
Our competitive advantages include the following:
• our anthracite coal products are of high-quality. They have the characteristics of low ash content, low sulphur content, low harmful elements, and high lump yield. Our coal can be sold at a relatively high price as compared to that of our competitors;
• we have installed coal preparation facilities at all of our three mines in commercial production, which would enable us to enhance the quality of our clean coal and fine coal products;
• we are strategically located in the Bijie region of the Guizhou Province. Guizhou is the only province in Southwestern and Southern China with a net export of anthracite coal. As it is not economically feasible to transport and sell coal from Northern China to the Southwestern and Southern China, the selling price in the region is generally higher than that in Northern China; and
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INDUSTRY OVERVIEW
• as a qualified consolidator in the mining industry, we are able to benefit from favourable industry policies which enable us to acquire high quality coal resources.
For details, please refer to “Business — Our Competitive Strengths”.
Raw Materials of Anthracite Coal Production in Guizhou Province
The main costs of sales for coal mining enterprises are staff costs (such as salaries and welfare benefits for staff) and raw materials (such as explosives, consumable and spare parts in connection with mining operation). With the weakening of the coal mine market, mining enterprises in Guizhou cut costs to achieve competitive pricing. The average staff costs in Guizhou Province in 2013, 2014 and 2015 are RMB 99 per tonne, RMB 83 per tonne and RMB 72 per tonne respectively. The average costs for raw materials in 2013, 2014 and 2015 are RMB 29 per tonne, RMB 27 per tonne and RMB 25 per tonne respectively. For details regarding our costs, please refer to “Financial Information - Costs of Sales”.
Opportunities and Challenges
It is expected that both the PRC central and local governments will intensify effort in resolving coal overcapacity, which will reduce the number of coal mines, cut production in Southwestern and Southern China and raise the entry barrier of the anthracite coal industry. The reduction of supply in Southwestern and Southern China is expected to provide positive stimulations for our business operation in the future. Please refer to “PRC Laws and Regulations — PRC Laws Relating to Mining Resource Consolidation” for details.
The PRC government has also imposed restrictive measures on anthracite coal imports. On 8 October 2014, the Customs Tariff Commission of the State Council released the Circular on Adjusting the Import Tariffs for Coal (國務院關稅稅則委員會關於調整煤炭進口關稅的通知) (the “Circular”). The Circular states that, from 15 October 2014 onwards, the zero import tariff rate applicable to anthracite coal would be cancelled and would be adjusted to the most-favoured-nation tariff rates which is 3%. In addition, the Interim Measures for the Quality Management of Commercial Coal (商品煤質量管理暫行辦法) promulgated by SAIC, MOFCOM, Ministry of Environmental Protection, General Administration of Customs, NDRC, and the General Administration of Quality Supervision, Inspection and Quarantine (中國國家質量監督檢驗檢疫總局) (“Interim Measures”) provide that coal below a certain standard could not be imported and/or transported beyond a certain distance. The tightening quality inspection of imported coal and imposition of tariff on anthracite coals is expected to lead to an increase in demand for our products.
However, it should be noted that the reduction in production capacity will take around three to five years. During this time, it is expected our Group will still face challenges such as the decline in sales of anthracite coal and the weakening of the anthracite coal industry in general.
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INDUSTRY OVERVIEW
THE CBM INDUSTRY
CBM is a by-product of coal mining contained in the coal seams which has the same application as natural gas. It could be transmitted through pipelines after purification and compression. CBM has become an increasingly important source of natural gas supply in China. The share of CBM output in China has increased from 11.2% of the total natural gas output in 2013 to 13.3% in 2015. The mine gate sales price for CBM was 1.8 RMB/m3 in 2015.
According to the National Bureau of Statistics, China produced 18 billion m3 of CBM in 2015, including 4.4 billion m3 of ground gas extraction output and 1.36 billion m3 of underground gas extraction output. Currently, Qinshui CBM-bearing basin in the Shanxi Province is the only region in China that has large-scale commercial production of CBM.
China is heavily dependent on natural gas import. It imported 93.5 billion m3 of natural gas in 2015 and consumed a total of 193.2 billion m3 in the year, the foreign-trade dependence surged from 1.7% in 2006 to 48.4% in 2015. China also has an increasing demand on CBM resources. From 2013 to 2015, China’s CBM consumption rose from 5.3 billion m3 to 8.6 billion m3, with a CAGR at 14.2%.
The Chinese government has implemented an action plan to optimize energy consumption mix and to raise the share of natural gas in total energy consumption. According to the “Action Plan for China’s Energy Development Strategy” (2014-2020) issued by General Office of the State Council, the share of natural gas is expected to increase to 10% of the total energy consumption mix. The price for CBM is also expected to increase year by year from 2016 to 2020 due to increasing demand and the implementation of favourable policy measures.
Our coal mines are located in Qianxi CBM-bearing basin which is the fourth largest CBM-bearing basin in China. According to SRK’s Report, all of our four coal mines are classified as high-gas mines with total estimated CBM gas resources of 765 million m3. Extracting CBM not only reduces the safety risks in our coal mines, it is also another source of clean energy that can be used in power generation. We have entered into an exploration and utilization agreement with Southern Power Grid with respect to the exploration and utilization of CBM drained from Weishe Coal Mine. Our successful cooperation with Southern Power Grid has laid a solid foundation for our future development of clean energy business. For details of our competitive advantage in the CBM industry, please refer to “Business — Our Strength”.
THE ACTIVE CHARCOAL INDUSTRY
Active charcoal is produced through pyrolysis process with coal, coke, wood and fruit shell, etc. It is mainly used for water treatment, food decolouration and gas purification.
China is the largest producer of active charcoal in the world with a production capacity of approximately 520,000 tonnes. The production bases are concentrated in, amongst other areas, Shanxi, Ningxia, Henan and Fujian Provinces. The current output of active charcoal produced by China is sufficient to satisfy its domestic demand. However, China’s active charcoal consumption as a
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INDUSTRY OVERVIEW proportion to its output has risen year by year. Pursuant to the Fenwei Report, the consumption of active charcoal in China rose from 176,000 tonnes to 256,000 tonnes during the period from 2013 to 2015, at a CAGR of 21%. The demand for coal-based active charcoal products increase from 10,700 tonnes in 2013 to 154,000 tonnes in 2015, at a CAGR of 20%.
With the launch of more stringent environmental protection policies by the PRC government, it is expected that there will be further increase in the demand for active charcoal in the future. Fenwei expects the demand for active charcoal to increase from 256,000 tonnes in 2015 to 350,000 tonnes in 2020. In addition, the robust demand for active charcoal in the waste water treatment and drinking water purification industry is expected to drive the continuous growth for the high-end active charcoal industry. According to Fenwei, China’s average sales price of coal-based columnar active charcoal was 11,640 RMB per tonne in 2015. With favourable stimulation in both environmental policies and demand, Fenwei expects that the price of active charcoal in the domestic market to rise during the period of 2016-2020.
According to a preliminary laboratory result conducted by China University of Mining and Technology* (中國礦業大學), the anthracite coal produced by our Group has low ash and low sulphur content. It can be used as a raw material to produce high-quality active charcoal for water treatment. The coal produced by our Group is suitable for producing coal-based columnar active charcoal, which can be used for drinking water purification, waste water treatment, monosodium glutamate and sugar decolouration, high-end solvent recycling and gas purification. Exploring into the active charcoal industry also allows us to diversify our product mix, extend our coal value chain and benefit from the high sales price of active charcoal.
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