VZCZCXRO4895
RR RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4258/01 3380358
ZNR UUUUU ZZH
R 040358Z DEC 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 2691
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAEPA/HQ EPA WASHDC
RUEAUSA/DEPT OF HHS WASHDC

UNCLAS SECTION 01 OF 04 BEIJING 024258 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EAP/CM GWARD AND PSECOR, EB/ESC PHAYMOND 
STATE FOR OES/WATSON AND DEROSA-JOYNT 
STATE PASS TO CEQ CONNAUGHTON 
NSC FOR RHUNTER, JSHRIER, DWILDER 
USDOE for DOE OIC DPUMPHREY, OFFICE OF THE SECRETARY for 
MWILLIAMSON 
TRESURY FOR OASIA/ISA ADAMS/DOHNER/CUSHMAN 
USDOC FOR 4220/ITA/MAC/CMMCQUEEN/HAMROCK 
USDOC FOR 1003/ITA/OUS/OC 
USDOC FOR 6310/ITA/TD/OIEM/KMURPHY/HBURROUHGS 
UDDOC FOR 6000/ITA/TD/RPACE 
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL 
HHS FOR STEIGER, ELVANDER AND BHAT 
 
E.O. 12958: N/A 
TAGS: ENRG PREL ETRD SENV TRGY CH
SUBJECT: CHINA/COAL: VISIT TO SHANXI PROVINCE MINE BRINGS ISSUES TO 
THE SURFACE 
 
Summary 
------- 
 
¶1. (SBU) Coal is likely to provide 65 to 70 percent of China's 
energy needs for at least the next 20 years, according to industry 
estimates, yet the sector itself faces widespread challenges related 
to transportation, industry restructuring, profitability, and 
safety.  All of these problems were on display, or came up for 
discussion, during Econoffs' recent visit to a large coal company in 
Shanxi Province.  Company officials said their ability to generate 
profits is compromised by the requirement to provide social services 
for over 250,000 workers and dependents.  They described extensive 
transportation bottlenecks as they work towards doubling output over 
the next five years.  They also complained about unfairness in who 
gains from coal extraction, alleging that downstream consumers, such 
as power companies, use their influence to capture returns that 
should go to miners who toil in dangerous conditions.  This view was 
partly contested by two industry observers based in Beijing.  End 
Summary. 
 
Coal Mine Visit Background 
-------------------------- 
 
¶2. (SBU) In late November 2006, Econoff and Embassy Labor Officer 
visited the Yangquan Coal Industry Group Company (YCG) in Shanxi 
Province to tour a company coal mine and meet with YCG and Chinese 
Government officials.  Emboffs toured YCG's Xinjing mine which 
participates in a United States Department of Labor (USDOL) mine 
safety management and training project. Additionally, Emboffs 
visited an underground mine safety training center, toured other 
facilities at the Xinjing mine, and held broad ranging mine safety 
and coal sector discussions with YCG and Chinese Government 
officials. (Note: Please see septel for information relating to 
YCG's participation in  the USDOL mine safety program. End Note.) 
 
 
YCG: Impressive Production and Sales Statistics... 
--------------------------------------------- ----- 
 
¶3. (SBU) YCG is a large state-owned enterprise (SOE) comprised of 
more than twenty separate companies, including one publicly listed 
on the Shenzhen and Shanghai bourses.  Individual companies within 
the group are involved in the coal, electricity, aluminum, and 
property construction and development sectors.  The company's seven 
operational mines in 2005 had a combined output of 30.8 million 
metric tons of coal.  Company officials stated their goal is to 
double coal output in the next five years.  YCG had sales revenues 
topping one billion USD in 2005 and the company expects to triple 
its sales revenue within the next ten years. 
 
...Resulting from a Commodities Based Business Plan... 
--------------------------------------------- --------- 
 
¶4. (SBU) Company officials stated that over the past several years, 
YCG has gone from being strictly in the coal mining business to 
becoming a commodities company.    The company recognizes that by 
using more advanced technology and management techniques it can 
differentiate its coal product streams.  This approach allows YCG to 
separate more valuable coal products, such as blast furnace coal, 
from lower-grade and lower-cost coal, such as that used for heating 
purposes.  Company officials stated that this transition has 
increased the company's profitability and justifies ongoing company 
spending on technology and training. 
 
¶5. (SBU) Company officials said that they plan to expand 
productivity and improve worker safety through adoption of the 
latest mining technology.  As an example of the technology 
investments the company is making, YCG officials gave Emboffs a tour 
of the Xinjing mine's operations center.  The computerized 
operations center has real-time video feeds from throughout the 
mine, monitors environmental conditions such as methane gas levels, 
 
BEIJING 00024258  002 OF 004 
 
 
and tracks the operational status of major pieces of equipment. The 
operations center is also testing a helmet-mounted miner location 
system that provides a real-time location of each  working miner. 
(Note: A unique feature of the miner location system is its ability 
to differentiate Communist Party members from non-members.  The 
system does so by the color of helmet used to display the miners' 
location-red helmets from Party members and black for non-members. 
End Note.) 
 
...Compromised By A Legacy SOE Structure 
---------------------------------------- 
 
¶6. (SBU) YCG officials stated that the company's  financial success 
is being tempered by its requirement to provide for its large number 
of employees and dependants.  The company has some 100,000 
employees, 40,000 of whom are involved in coal mining, and is 
responsible for providing social services to around 250,000-300,000 
workers and dependents.  The company's social service 
responsibilities include provision of health care, housing, and 
primary and secondary education, according to company officials. 
Additionally, the company operates its own police and fire 
departments as well as providing some basic utility services to its 
employees, such as home heating and cooking gas. 
 
Transportation Difficulties Limit Production... 
--------------------------------------------- -- 
 
¶7. (SBU) YCG officials noted that transportation difficulties are 
impeding the company's coal production output.  The company could 
safely increase its production by 20 percent if it had more 
transportation resources available.  Company officials estimate that 
the company ships 75 percent of its production by truck with the 
remainder moving by rail.  The Yangquan area has one main rail line 
and roadway linking it to the rest of the province.  The expressway 
is heavily burdened with traffic and is subject to weather-related 
closures. (Note: On the day of Emboffs arrival in Shanxi Province, 
the expressway was closed for several hours due to heavy fog.  End 
Note.)  YCG officials stated that they must compete with railway 
passenger cars for access to the one rail line in and out of the 
area. 
 
...But Officials Hopeful They Can Be Resolved 
--------------------------------------------- 
 
¶8. (SBU) YCG officials stated that they are hopeful that their 
transportation difficulties can be overcome during the next five 
years. The company is negotiating with Ministry of Railways to shift 
some passenger service away from the area to allow for more freight 
traffic.  Company officials stated that they are working with 
government officials from neighboring Hebei Province, the over-road 
destination for much of the company's coal, to explore how to expand 
the capacity of the expressway connecting the two areas.  (Comment: 
Beyond these two examples, company officials offered little insight 
as to how they would surmount transportation limitations while 
concomitantly doubling coal output during the next five years. End 
Comment.) 
 
YCG: Market, Other Factors Raising Coal Prices... 
--------------------------------------------- ---- 
 
¶9. (SBU) YCG officials, in response to a question from Econoff, 
stated that the perception large SOE Chinese coal companies are 
earning too much money is ridiculous.  Demand for coal in China is 
growing rapidly, and it is only natural that prices would rise as 
well, according to company officials.  The officials said that more 
stringent environmental and work safety standards leveled on the 
company, along with other large state-owned mining companies, are 
contributing to rising prices as well.  YCG and other large SOE coal 
producers earn around 100-120 RMB for every metric ton they produce, 
according to YCG officials.  Small, private producers which are not 
making similar mine safety and environmental protection investments 
 
BEIJING 00024258  003 OF 004 
 
 
are much more profitable, earning 200 RMB for every ton produced. 
 
¶10. (SBU) We note that "small" coal mines in China are most 
frequently defined as those with less than 30,000 metric tons of 
coal production per year.  In 2004, the Chinese Government estimated 
that there were some 23,000 small mines in China.  The China Coal 
Industry Association estimates that small, private coal mines 
account for one-third of total Chinese coal output. These producers 
also account for more than two-thirds of China's reported coal mine 
accident fatalities. 
 
...But Others Earn Too Much From Our Work 
----------------------------------------- 
 
¶11. (SBU) YCG officials complained that coal mining is a very 
dangerous business and thousands lose their lives each year in 
mines, yet downstream consumers , such as power companies, have used 
their political and economic influence to earn large profits to 
ensure that their employees receive generous salaries and benefits. 
It is not unreasonable for coal companies to seek the same benefits, 
they said.  Separately, a Central Government mine safety official 
claimed that it is well known that Chinese power companies earn too 
much money, much of it at the expense of coal companies, and that 
their employees are compensated too well for the work they perform. 
 
 
Power Companies Offer Different Take on Prices 
--------------------------------------------- - 
¶12. (SBU) In a separate meeting held in Beijing,  Xiao Jun, Deputy 
General Manager for International Cooperation at the China Huaneng 
Group, told Econoff that power companies' profit margins are being 
cut by rising Chinese coal prices.  Huaneng this year threatened to 
buy coal from Australia when negotiating coal prices with domestic 
coal producers.  This tactic provided some temporary leverage over 
domestic producers, but is not a long-term solution to rising coal 
costs, said Xiao. 
¶13. (SBU) Dr. Chi Zhang, a power analyst with Cambridge Energy 
Research Associate's Beijing office, said that Huaneng's complaints 
result from China's regulated electricity prices not keeping pace 
with market-based coal prices. The Central Government in 2005 
developed the "coal pass through system" in an effort to address 
this problem. The system is intended to allow the regulated 
electricity price to increase in order to pass increased coal costs 
to power consumers.  Dr. Chi noted that the problem from the power 
companies' perspective is that only 70 percent of the coal price 
increase can be passed to power consumers. Power generators must 
absorb the remaining 30 percent of the coal cost increase and this 
is eroding their profit margins. 
YCG's Contempt Leading To Its Own Downstream Plans 
--------------------------------------------- ----- 
 
¶14. (SBU) YCG officials stated that during the nexQ years they 
want to expand into the power generation business.  The company 
generates power for its own use and provides some limited resources 
to the local area.  YCG currently uses coal to fuel its power 
generation plant, but expects to turn to mine-mouth gas to power the 
company's foray into commercial power generation, said company 
officials.  YCG officials explained that their plan is to sell the 
power onto the national power grid. 
 
¶15. (SBU) Note: China's largest coal company, the Shenhua Group, has 
already made this move.  Shenhua will generate around 10 gigawatts 
of electricity at its power plants in 2006 and plans to expand its 
production in the coming years.  Chinese power companies are also 
experimenting with expanding into the upstream coal mining business. 
 The Huaneng Group owns and operates several of its own coal mines, 
but company executives told Econoff that so far they consider they 
experiment to be disappointing. End Note. 
 
Comment: Visit Lays Bare Issues Facing Coal Sector 
--------------------------------------------- ----- 
 
BEIJING 00024258  004 OF 004 
 
 
 
¶16. (SBU) Comment: Emboffs visit to YCG highlighted many of the 
issues facing China's coal sector.  Coal production in 2006 will top 
2 billion metric tons and will be used to meet 70 percent of China's 
overall energy needs.  Even the most optimistic forecasts have coal 
meeting at least 65 percent of China's energy needs for the next 20 
to 25 years.  The coal sector is beset with safety problems with 
almost 6,000 reported deaths in 2005, hamstrung by transportation 
woes, and is increasingly being blamed for environmental problems. 
Beijing's answer to these problems has been to call for greater 
consolidation in the sector.  This should result in increased 
reliance on large SOE coal producers such as YCG and Shenhua.  In 
particular, Beijing believes that its oversight over the large SOEs 
will allow it to enforce more stringent safety and environmental 
regulations. 
 
¶17. (SBU) Based on our visit and discussions with industry 
representatives, it is clear that the most glaring problem with 
Beijing's plan is that the country's rising coal demand outstrips 
the ability of large SOE coal companies to make up for production 
lost by closing small mines while simultaneously meeting rising coal 
demand.  Beijing's strategy also is being undermined by local 
governments' efforts to preserve local jobs and maintain tax revenue 
from small producers.  It is unclear how long it will take for 
Beijing's consolidation plan to work, if it ever will.  In the near 
term, the largest SOE producers will continue their march towards 
world-class status by becoming more technologically advanced, more 
efficient, and more profitable.  Meanwhile, despite Beijing's 
efforts, China's thousands of highly profitable small-sized mines 
will continue Q often unsafe and environmentally unfriendly 
production in order to help meet China's growing demand for coal. 
End Comment.