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Cablegate: Shanghai Energy Experts - Coal Is King

VZCZCXRO2248
RR RUEHCN RUEHGH
DE RUEHGH #0284/01 2100906
ZNR UUUUU ZZH
R 280906Z JUL 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6999
INFO RUEHBJ/AMEMBASSY BEIJING 1987
RUEHCN/AMCONSUL CHENGDU 1310
RUEHGZ/AMCONSUL GUANGZHOU 1281
RUEHHK/AMCONSUL HONG KONG 1452
RUEHSH/AMCONSUL SHENYANG 1308
RUEHIN/AIT TAIPEI 1119
RHEHAAA/NSC WASHINGTON DC
RUCPDOC/USDOC WASHDC 0218
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 7569

UNCLAS SECTION 01 OF 02 SHANGHAI 000284

SIPDIS

TREASURY FOR AMB. HOLMER, WRIGHT, TSMITH, AND OAISA - DOHNER,
HAARSAGER, CUSHMAN
USDOC FOR ITA MAC DAS KASOFF, MELCHER, MCQUEEN
NSC FOR WILDER AND TONG

E.O. 12958: N/A
TAGS: ENRG ECON ETTC EINV CH
SUBJECT: SHANGHAI ENERGY EXPERTS - COAL IS KING

SHANGHAI 00000284 001.2 OF 002


1. (SBU) Summary. With summer peak demand for power
approaching in East China, another round of possible thermal
coal shortages is causing great concern. Industry experts said
the main bottleneck in China's thermal coal supply is
transportation, although coal exports (encouraged by a gap
between world and domestic prices) and closures of small mines
are also exacerbating factors. Power generation companies are
trying to improve efficiency and diversify their energy mix, but
many experts believe that East China will remain heavily
dependent on coal well into the future. Local governments are
also looking for ways to improve energy efficiency and promote
environmental protection to improve the power situation. End
Summary.

2. (SBU) Econoff recently met with Shanghai energy analysts and
municipal government officials to discuss energy issues in East
China. (Non-power related energy issues reported septel.)
Meeting participants included investment research firm CLSA's
Deputy Head of China Research Utility and Machinery Sectors
Manop Sangiambut, Shanghai Economic Commission Deputy Director
of Economic Operation Department Wu Jin Cheng, a McKinsey
partner specializing in energy consultancy, and a Shanghai based
energy analyst for BHP Billiton.

Transportation Bottlenecks Cause Coal Shortages
--------------------------------------------- --

3. (SBU) Both Sangiambut of CSLA and the McKinsey consultant
separately agreed transportation bottlenecks are the primary
cause of coal shortages. They noted heavy floods in Southern
China have aggravated the problem, but transportation remains
the biggest concern. According to Sangiambut, the central
government is adding 10-15 percent extra railway capacity every
year, primarily for coal transportation. Deputy Director Wu
observed a major expansion of the Daqing Line is underway,
noting it will help relieve the bottleneck for coal movement
between Datong in Shanxi province, a key area for coal
production in China, and Qinghuangdao in Hebei, a port city that
ships coal to the coastal areas where large amount of electric
power is needed to fuel economic growth. According to Wu,
Shanghai receives most of its coal by sea.

Coal Exports on the Rise
------------------------

4. (SBU) Increasing coal exports are also lowering domestic
coal supplies. According to a July 10 article in Chinese
Business News, coal exports in June increased 83.5 percent year
on year to reach 6.99 million tons, the highest level since
March 2005. Total coal exports of 25.49 million tons from
January to June this year mark an increase of 10.2 percent
compared to the same period last year. The main reason for the
increase is a relatively high world price, the article explains.
Even though the domestic coal price has also soared from below
RMB 600 (USD 88) per ton in April to over RMB 1,000 (USD 147) in
early July, domestic prices are still below world coal prices at
about 200 USD. Interlocutors speculated that the central
government will adopt policies to discourage coal exports in the
second half of 2008.

Small Mine Closures
-------------------

5. (SBU) The closure of small mines is another factor
contributing to tight coal supplies. For environmental and
safety reasons, the central government has been closing small
privately owned mines. Wu remarked all small mines under
300,000 tons of annual production are still closed, while those
above 300,000 tons are undergoing safety changes before resuming
production to relieve coal shortages. Although the general
belief is that coal mining capacity from small mines is one
third of total capacity, the BHP Billiton analyst believes that
number could be as high as 50 percent.

Price Cap Increases May Not Significantly Help Generators
--------------------------------------------- ------------

6. (SBU) The National Development and Reform Commission
announced on June 19 the initiation of an intervention mechanism

SHANGHAI 00000284 002 OF 002


to temporarily control coal prices until the end of 2008.
During this period, coal prices for power generation are not to
exceed the June 19 spot price. While this announcement gives
power generation companies hope for temporary price stability,
the McKinsey consultant does not believe that the price cap will
significantly help generators. He noted that the policy only
applies to state-owned coal mines, while many independent mines
are not subject to the price cap. Second, as transportation
costs are not included, the final price power companies pay may
vary greatly. He noted, for example, the price for the same
thermal coal can more than double from Inner Mongolia to
Shanghai.

China Will Diversify, But Coal Will Remain Central
--------------------------------------------- -----

7. (SBU) CLSA's Sangiambut observed power generation companies,
facing record high coal prices and growing domestic demand for
electricity, are trying to improve efficiency and diversify
their energy mix. He also noted the government is working on a
more extensive energy conservation campaign. For instance, they
are trying to invest in more efficient plants, as well as
upgrade existing 600 MW plants to 1,000 MW. He observed that on
average, 1,000 MW plants are about 20 percent more efficient
then 600 MW plants (i.e. requires 20 percent less input per unit
energy).

8. (SBU) Sangiambut speculated that over the next 10 years,
coal will remain the main energy source for China, though its
current 70 percent share of China's energy portfolio will likely
decline to 60 percent by 2020. In the interim, present
investment in coal will cause its share to peak at 75-85 percent
before subsequently declining. The McKinsey consultant expected
an even larger decline to 50 percent by 2020. He similarly
expected coal's share to peak in the near term.

9. (SBU) Regarding other energy sources, Sangiambut estimated
hydro's share of China's energy portfolio will drop from 20
percent to 15 percent as the most easily tappable hydro energy
is already being harnessed for electrical generation. Nuclear,
he believes, will increase from 2 percent to 4 percent, while
liquefied natural gas (LNG) will increase to 10-15 percent over
the next 10 years. Both he and the McKinsey consultant
suggested China's LNG potential is limited due to already tight
global supplies. Other renewables such as wind, solar and
biofuel will also increase, but will remain only a small portion
of China's total energy mix.

Energy Conservation Efforts
---------------------------

10. (SBU) Wu from the Shanghai Economic commission noted that
coal-fired power plants are still Shanghai's dominant source of
energy. However, with the recent national focus on
environmental protection and energy efficiency, Shanghai has
taken several steps to limit pollution and promote conservation.
For instance, Shanghai's natural gas fired plant is
increasingly being used for peak demand. Natural gas produces
about half the carbon emissions of a coal fired plant, without
emitting nearly as much sulfur or other polluting chemicals Wu
observed. Wu also noted energy intensive and high polluting
enterprises are being requested to make changes or suffer a
higher power tariff. Wu mentioned the local government is also
giving out subsidies for energy-saving bulbs.
JARRETT

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