Buoyant demand and the government's tougher moves to rein in dangerous overproduction will keep China's coal supply tight over the coming months, according to market observers.

Strained supply will also mean there is no let up in high domestic coal prices which have already increased by more than 40 percent over the past year.

Coal supplies 70 percent of the energy needs of China's roaring economy. The high coal price will have a "domino effect" on the national economy: As coal prices remain high, the government is set to raise the electricity rate to help power plants pass on the hike in fuel costs. Consequently, the electricity rate increase will boost the costs of many downstream sectors, such as steel, metallurgy, and cement, fanning the flames of inflation.

Some economic powerhouses, such as Shanghai and Guangdong Province, may also have to face some disruption in their coal supplies, worsening the power cuts that have now become a common feature of Chinese summers.

Signs show the market is shrugging off its relatively sluggish sentiment in the first quarter. The quoted benchmark coal price for the second quarter in North China's Shanxi Province increased by 10 to 15 yuan (US$1.2-US$1.8) a ton over the first quarter, or around 5 percent, according to traders in the province. Shanxi is China's largest coal producer, accounting for a quarter of the country's total output.

"Supply has become very tight these days. The local government is conducting a safety inspection and closing illegal and dangerous coal mines," said an official at the Taiyuan Coal Trading Centre.

The government is tightening controls on safety at collieries, following a series of disastrous gas explosions at Chinese coal mines over the past two months, including one which killed 214 people in February in Fuxin, Northeast China's Liaoning Province.

One measure to boost safety is to stop mines producing beyond their designed capacity, a step that has been taken by the local government in Shanxi Province.

In addition, coal mines have to suspend their operations to allow safety inspections to take place. Those failing the inspection have to remain closed until the problems are corrected.

To cash in on surging coal prices, most of China's coal mines have been working at 20 to 40 percent beyond capacity, meaning that vital rest periods, maintenance work and safety inspections do not take place.

Government officials warned that 40 percent of the nation's coal mines have been operating in dangerous conditions that might lead to severe accidents such as explosions or flooding.

With the production increase in check, the manager at the Taiyuan Coal Trading Center said she expects the coal price to remain high in the second quarter and further increase in the third quarter, the traditional peak consumption season.

The anticipated pick-up will be a sharp contrast to the somewhat stagnant market in the first quarter of this year.

Stocks were piling up in major ports over the past three months, price increases were slowing down, and demand remained limp.

Some observers start to worry the market would fall into a slump after expanding at a double-digit rate for more than two years.

At the end of last month, the port of Qinhuangdao in North China's Hebei Province, the major port to ship coal to markets in eastern and southern China, had a stockpile exceeding 4 million tons, more than one-third greater than its normal level.

Major power plants in eastern and southern China have also see their stocks mount up in the first three months of 2005.

Such a growth in stocks was a rare sight over the past two years, when coal mines found it hard to keep up with the rapid growth in consumption.

But most market analysts said the sluggish sentiment is seasonal rather than a sign of chronic oversupply.

The seasonal weak demand, sufficient railway transportation and falling quality are contributing to the market doldrums.

"Stocks are rising as the coal demand was weak," said an official at the Qinhuangdao port.

He added that the hydropower sector is picking up in some parts of southern China, replacing some of the need for coal.

Zhang Wenxian, a coal market analyst at Guotai Jun'an Securities Hong Kong, said demand was suppressed as most the coal-consuming industries suspended their operations for more than a week in February to celebrate the Spring Festival.

Meanwhile, major power plants have frequently arranged maintenance to prepare for the consumption peak in the summer, also cutting demand.

And consumers are not rushing to buy more coal also because its quality has been dropping.

In addition, coal buyers have transported more coal in the first quarter before the Datong-Qinhuangdao railway, the major transportation link, started the construction work for its expansion.

But most analysts said the market is going to recover.

"The general picture is that coal supply will remain tight in the coming months," said the official at Qinhuangdao port.

On the demand side, China's robust economy is showing no signs of slowing down.

The appetite of big consumers such as the power, metallurgical and construction industries, remain as voracious as ever. In the power industry alone, an additional 100 million tons of coal is needed to feed new generators supplying 50,000 megawatts of electricity this year.

The China Coal Industry Association predicted earlier this year that the nation's coal consumption is expected to rise 120 million tons to 2.1 billion tons this year - an increase of 6 percent.

Although that is slower than last year's growth of 12 percent, supply still seems to lag behind.

The opening of new mines will only increase supplies by 100 million tons this year, the association has said.

Even this additional coal supply may not be realized as the crackdown on illegal and dangerous coal mines keeps supplies tight.

Wang Ye, an industry analyst with China Merchants Securities, expected coal prices to remain at their current level, if not further increase, during the rest of the year.

(China Daily April 7, 2005)