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