CoalCoal

Jason Zhong

Ron Huang

IntroductionIntroduction

• Coal is a nonrenewable energy source.• It’s a combustible black or brownish-black rock

composed mostly of carbon and hydrocarbons.• However, It’s relatively cheap and abundant

than crude oil and natural gas. • At current production levels, coal reserves are

estimated to last 155 years. In contrast, oil and gas reserves are equivalent to around 41 and 65 years at current production levels respectively.

IntroductionIntroduction

• Coal is used mainly in electricity, in industry, and in the manufacturing of steel.

• 68% of total global steel production relies directly on inputs of coal. Some steel production relies on electric stove which is indirectly required the inputs of coal to create electricity.

• There are many types of coal; different countries have different standard in classifying coal in terms of its content.

• Lignite, sub-bituminous, and bituminous coal are commonly being used as fuel for steam electric power generation.

Project ObjectiveProject Objective

• We would like to illustrate that cheap and nonrenewable energy, such as coals are increasingly important in China as crude oil and natural gas price surge by the following perspective:

1. Valuation

2. Cost (ex: total investment cost, transportation cost)

Coal Production and Consumption Coal Production and Consumption In ChinaIn China

• The following charts have been collected from China statistics that give you a general idea on: – How much coal are represented the

percentage of total energy production and consumption in China?

– What’s the exact number of coal produced and consumed in China?

– What’s world position of China’s coal industry in terms of producers and consumers?

As Percentage of Total Energy As Percentage of Total Energy ProductionProduction

64%

66%

68%

70%

72%

74%

76%

78%

% of CoalUsed outof TotalEnergyProduction

As Percentage of Total Energy As Percentage of Total Energy ConsumptionConsumption

60%

62%

64%

66%

68%

70%

72%

74%

76%

78%

% of Coalout of TotalEnergyConsumption

Why Less Consumption?Why Less Consumption?

• It’s reasonable to believe that the Growth of overall consumption on total energy in China increases every year. Why coal consumption decreases over the year from 1985 to 2005?

• We believe the percentage on the chart is misleading. Percentage on coal consumption of total energy decreases, but the total amount of coal consumption didn’t decrease.

Why Less Consumption?Why Less Consumption?

The following is an example:

10 years ago: – Total Energy consumption = 1000 million tons– Total coal consumption = 750 million tons– % of coal used on total energy = 75% (750/1000)

Now:– Total Energy consumption = 2000 million tons– Total coal consumption = 1400 million tons– % of coal used on total energy = 70% (1400/2000)

Total Coal Production Total Coal Production & &

Total Coal Consumption In China Total Coal Consumption In China (1990-2005)(1990-2005)

Year 1990 1995 2000 2003 2004 2005

Total Coal Production(10,000 Tons)

102221.0133461.

7128297.

1163402.

0192265.

5214462.

1

Total CoalConsumption(10,000 Tons)

105523.0137676.

5132000.

0169232.

0193596.

0216557.

5

Top Ten Coal Consumers Top Ten Coal Consumers Countries, 2004( in million tons)Countries, 2004( in million tons)

Top Three Coal Producers Top Three Coal Producers (in million tons) (in million tons)

Coal, Oil, and Gas Price Coal, Oil, and Gas Price ($us per tons)($us per tons)

ObservationsObservations• For many years, China relied heavily on coal as

source of cheap energy. Even without gas or crude oil, Chinese light is still able to keep sparkling.

• For many years, total consumption on coal has always exceeded the total production of coal, because production capacity has always been controlled by the government, and they also import coal from other countries.

• Not only China is the largest consumers of coal, but they are also the largest producers of coal.

Does coal help reduce world Does coal help reduce world inflation?inflation?

• Most Importantly, coal is good for smoothing worldwide inflation rate.

• If China uses crude oil or natural gas as a source of energy to produce the product to the importing countries, consumers from the importing countries will have to pay more for their products.

• On the other hand, if China uses coal as a source of energy to produce products, consumers from importing countries will pay less for their product, because coal is relatively cheaper than crude oil and natural gas.

ValuationValuation1. There is a strong Demand for Coal; China’s GDP is

predicted to grow at 9 -10% through 2008 and 2009. Coal is still deemed to be the cheapest sources of energy comparing to crude oil and natural gas. It makes more economic sense to use even more coal.

2. Information Theory: Most of us may aware of the crude oil prices more than coal prices, because there are much more media coverage on crude oil than coal. Base on the information theory, the more people know about the investment, the return will be less. However, if the information is known to a few, the return on investment will be high. Example: Mongolia Energy

Mongolia Energy (0276.hk)Mongolia Energy (0276.hk)

Investing StrategyInvesting Strategy

• Invest in long position on companies that are not popular now, but they will be popular in the future. Don’t worry if the company is not making money in the short run. For example, the U.S has the biggest reserve of coal in the world. U.S coal companies will be a good investment when crude oil went out soon.

Investing StrategyInvesting Strategy

• If you are risk averse, maybe the following strategy will be interesting to you.

• Maybe in the next two years, you have accumulated some funds for investing, but you don’t have the time to follow the market.

• You can invest your money in low risk stock, such as financial institutions, and most of them do pay dividends. Once you think you have earned enough dividend, you can use the dividend to buy very risky penny stocks, such as Mongolia Energy.

ValuationValuation3. Sustainability: Crude oil’s reserve is equivalent to 41

years at current production level. In the next two to three decades, we believe the supply of crude oil will be much more intense. When crude oil is pretty much gone, coal will be the next popular source of energy. As a result, coal in the long run will have much more sustainability than crude oil, because coal’s reserve will last for 155 years.

4. Thousands of illegal coal mines are still operating in China. Is the Chinese coal business profitable, so that attracting more competition? If someone is participating in illegal activities, the reward or return must be greater than the risk of being caught or else no one is going to do it.

Coal-fired, Wind, Nuclear, and Coal-fired, Wind, Nuclear, and Water powerWater power

Consumption of a few main source Consumption of a few main source of energy in Chinaof energy in China

Which one is more expensive?Which one is more expensive?

• We believe coal is still the cheapest source of energy to generate electricity. Let’s look at different type of methods in generating electricity!

1. Hydropower: use only locally and difficult to find an ideal location to build a dam.

2. Nuclear Power: relatively new technology to china and high investment cost.

3. Wind Power: relatively new technology and

provide very low magnitude of electricity, the highest cost per kwh

Cost Structure SummaryCost Structure Summary• The following tables are assumed that the different type of

power plant can provide 100,000 kwh.

Total Cost to Build

($ Yuan)

Cost per kwh($Yuan)

Coal-Fired 0.5 billion0.25 to 0.3

cents

Wind Power 0.8 to 1 billion 0.5 to 0.6 Cents

Hydropower 0.7 billion 0.2 to 0.3 Cents

Nuclear Power

> 3 billions0.41 to 0.45

Cents

Three Gorges Dam exampleThree Gorges Dam example• “Three Gorges Dam” is the biggest hydropower in

China, and it’s also the biggest construction project since the “Great Wall”. It’s power generation is equal to 18 nuclear power station, and it can satisfy 5% of the Chinese population.

• What’s the Cost of it?• The project will take 16 years from 1995 to 2011.• In 2008, the estimated total investment cost is

will be greater than 180 billion ($ Yuan). • >1 million local residents had relocate.• Can they build another one like this?

Transportation CostTransportation Cost

Transportation CostTransportation Cost

• After coal is mined and processed, it is ready to be shipped to market. The cost of shipping coal can cost more than the cost of mining it. It’s important to discuss the transportation cost.

• Most coal is transported by train, and all trains use in transporting coal in China are also using coal as a source of energy. About 70 percent of coal in the China is transported by train. Sometimes, coal-fired electric power plants are built near coal mines, and railway station to lower transportation costs.

Shenhua’s Asset LocationShenhua’s Asset Location(1088.hk, 601088.ss)(1088.hk, 601088.ss)

SHENHUA ENGYSHENHUA ENGY

Location of All Coal Mines in ChinaLocation of All Coal Mines in China

Location of all railway in ChinaLocation of all railway in China

Location of All Major Industries in Location of All Major Industries in ChinaChina

Location of All Major Ports in ChinaLocation of All Major Ports in China

ObservationsObservations• At this point, we believe that transportation

cost on coal is still very cheap, because all major coal mines are concentrated relatively close to major industries, ports, and efficient railway.

• Chinese Ministry of the Railway said Beijing plans to invest 1.25 trillion Yuan (U.S $160b) by 2010 on track, trains and civil engineering. It will make transportation and exploration much easier.

SummarySummary

• Coal is a nonrenewable energy, and it will only be less and less. It took 300 million years to form, but probably we will finish them in the next 155 years. However, we believe that coal has much more sustainability than crude oil. Once crude oil is gone, coal will be the next major source of energy.

• invest in the long-term!

Questions & AnswersQuestions & Answers