China's Energy Supply and Demand Situations

and Coal Industry's Trends Today

Cho Keii, Group Leader

Project Development Group, International Cooperation Department
The Institute of Energy Economics, Japan

1. The Chinese Economy and En-
ergy Supply and Demand Trends
in Recent Years
1-1 Economic trends and subjects
The two-decade-long economic development
under the banner of "reforms and opening" drasti-
cally altered the Chinese economic status. For in-
stance, China's share in the world's trades swelled
from 0.9% in 1978 to 3.3% by 1998. Since shifting
its policy to reforms & opening in 1978, China has
gotten out of the conventional self-sufficiency
economy by a step. Though still abiding by the self-
sufficiency principle, the country began groping for
a new path to attain exports-leveraged economic de-
velopment by taking advantage of its abundant and
cheap labor force in an export drive.
From 1991 through 1997, China's real GDP
growth has been kept higher than almost 11% a year
on average (Fig. 1-1). Yet, the Asian economic cri-
sis triggered in the summer of 1997 brought dark
clouds hanging over the Chinese economy. In 1998
China's GDP growth plunged to 7.8%. Cited below
are major factors that can endanger the Chinese
economy.
First, today's economic structure of China is very
vulnerable to the external economic moves (Figs. 1-
2 & 1-3).
Second, little progress in reforming the state-
owned enterprises results in mounting bad loans of
the Central Bank (Table 1-1).
Third, domestic consumption is flagging along
with deteriorating export competitiveness.
Fourth, widening income differentials broaden
regional gaps in economic development (Fig. 1-4).
Moreover, oversupplied workforce, combined
with short jobs, worsens the employment situation
and intensifies jobless problems. As of 1997 the job-
less rate in urban areas is officially put at 3.1%, or
5.7 million workers jobless. Actually, however, the
workers forced to stay home reportedly outnumber
11.5 million. By internationally approved standards,
China's 1997 jobless rate in urban areas stood at 4.2%,
or more than 9 million workers unemployed. With
all hidden jobless, like surplus rural workforce and

Fig. 1-1 Real GDP Growth and CPI (Consumer Price Index)
(Unit: %) (Unit: %)
16
'80 - '90 up 9.3% '78 - '98 up 9.7% 29
 on average '90 - '98 up 10.8%
 on average
14  on average
24
12 '78 - '80 up 7.7%
 on average
10 19

8 14

6
9
4
4
2

0 -1
78 80 82 84 86 88 90 92 94 96 98

GDP CPI

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.
redundant urban corporate personnel, taken into ac- low 10% and kept gradually decelerating. This over-
count, perhaps the jobless rate has already outrun shadows the future. As discussed in the next sec-
10%. tion, the recent economic trend has been causing dif-
Since around 1996, the real GDP growth fell be- ferent changes from the past ones to the Chinese en-

Fig. 1-2 Nominal GDP Growth and Growth of Contract Values with Foreign Countries
(Unit: %) (Unit: %)
120 400
Growth of investment-fund contract values
with foreign countries (right graduations)
350
115
300
110
250

105 200

150
100
100
95
50
Nominal GDP growth (left graduations)

90 0
78 81 84 87 90 93 96

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.

Fig. 1-3 GDP’s Dependence on Trade

(Unit: US$1 million) (Unit: %)
200 45
38.93%

150 40
Dependence on trade
(right graduations)
35
100

30
50 Export values
(left graduations)
25
0
20
Import values
-50 (left graduations)
15
14.67%
-100
10

-150 5
4.70%

-200 0
1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.

Table 1-1 Financial State of Chinese Manufacturing Firms (1997)

State-owned enterprises Collectively-owned Other ownership-

Overall
Total Large/medium Small enterprise based enterprises
No. of enterprises (10,000 firms) 37.25 6.59 1.48 5.11 26.41 4.25
Incl. red-ridden (10,000 firms) 8.78 2.58 0.62 1.96 4.73 1.46
Deficit ratio (%) 23.6 39.2 41.7 38.4 17.9 34.5
Total earnings (100 mil. yuan) 1627 451 517 ▲ 66 560 616
Losses of red-ridden firms (100 mil. yuan) (1341) (744) (543) (202) (229) (368)
Net profit to sales ratio (%) 2.7 1.6 2.2 ▲ 1.6 3.3 4.1

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.
ergy supply and demand situation, conventionally in
short supply. 1-2 Primary energy supply and demand
Three scenarios can be considered for the Chi- trends
nese economy from now on (Fig. 1-5).
The first scenario assumes that China returns to China's primary energy consumption (total do-
a high economic growth orbit as the country success- mestic supply), about 1 BTCE (billion tons coal
fully shifts its economic structure from exports-led equivalent) in 1991, grew by 3.9%/year on average
to domestic consumption-led types and also succeeds and reached 1.36 BTCE by 1998. Over this period,
in the reforms of government system, industrial struc- coal grew at a slower pace than the overall growth,
ture, financial system, state-owned enterprises, etc. or up 3.0%/year on average. On the other hand, oil
The second scenario supposes that the revived was up by an average 6.1%/year, natural gas up 4.1%,
Asian economy regionwide allows China to enjoy and hydro up 8.5%. Nuclear power generation was
an exports-led growth. introduced as well. As a result, of primary energy
The third scenario anticipates a prolonged stag- consumption mix in 1998, coal was responsible for
nation due to sluggish domestic demand and taper- 71.6%, oil 19.8%, natural gas 2.1% and hydro & oth-
ing inflows of foreign capital. ers 6.5% (Fig. 1-6 & Table 1-2).
Entering 1999, the Asian economy set to bounce Entering the 1990s, China has achieved an eco-
back gradually, which makes the second scenario nomic growth of the two-digit level. However, a
most plausible. Yet, the Chinese economy is wor- sheer shortage of supply to growing demand, attrib-
ried not to get a momentum until overseas capital utable to not merely the economic development but
inflows should fully be spurred. least-efficient energy use, poses a crucial bottleneck

Fig. 1-4 Area-specific Industrial Structure and Per Capita GDP

100%

2,679

80%
Tertiary industryﾕs share
1,809
60%
1,476
Secondary industryﾕs share
1,137
1,016 979
Per capita GDP
40%
1,144 822
616 621 662
930 621 497 512 Primary industryﾕs share
449 485
20% 778
508 643 491
447 453 467
451 398 349 447 252 329
0%
Shanghai

Tianjin

Zhejiang

Shanxi

Heilungjiang

Hebei

Fujian

Shanxi

Yunnan

Gansu

Sichuan

Anhui

Hunan

Nei Mongol

Hainan

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.

Fig. 1-5 Three Economic Scenarios

1. Successful reforms Expanding domestic demand, state-owned

enterprises getting out of red ink

2. Revival of the Asian economy Growing exports, inflows of overseas funds

3. Prolonged stagnation Flagging exports, fleeing overseas funds

(Source) Prepared by IEEJ.

to the economic development of China. To attain an
economic growth requires a sufficient growth of en-
ergy supply.
During the eighth five-year plan (1990 - 1995),
China's GDP (gross domestic product) was up 12%/
year on average, primary energy production up 4.4%,
and energy consumption up 5.5%. Energy elasticity
was 0.46. Over the five years, incremental energy
consumption averaged 60.59 MTCE (million tons
coal equivalent) annually, while incremental energy
production remained at 49.61 MTCE/year on aver-
age. The slower growth of energy production than
energy use became a grave problem.
The Chinese government has poured ample
funds into the effort to establish energy industry as
one of top priorities. Including oil exploration, coal
development, natural gas extraction and power plant
construction, a series of energy projects has been
under way in the short-supply districts.
But, rapidly expanded generating capacity and
disorderly developed local mines, combined with the
decelerated economic development by the Asian eco-
nomic crisis, precipitated changing supply and de-
mand balance on the market in the second half of
1997. Today, China's energy supply and demand situ-
ation, long seriously in short supply nationwide, un-
veils that a buyer's market has been formed gradu-
ally. In other words, the market is in energy gluts
today. A good example is coal stocks that have in-
creased year by year to 200 million tons in 1998,
compared with some 1,250 million tons of coal pro-
duced in that year.
1-3 Final energy consumption trends and
subjects
Table 1-3 shows historical trends of final energy
consumption mix by sector. It is noted that the sec-
tor-specific shares have remained virtually unchanged
since 1980. The industrial sector holds the largest
share at around 70%, higher than corresponding fig-
ures in the rest of Asia.
The special features of China's energy consump-
tion structure are that coal is responsible for 70%-
strong of primary energy supply and that the indus-
trial sector (incl. electricity) accounts for 70%-short
of primary energy consumption. Above all, as dis-
cussed later, more than 80% of coal consumption is
directly burned in boilers, etc. with proper environ-
mental measures not necessarily taken for economic
and technical reasons, among others. China, the
world's largest coal producer, also faces endangered
ecological system by coal development, environmen-
tal pollution by extracted residues, etc., which are
emerging as serious problems.
At present, China has such energy problems as
described below.
(1) Too much energy use disproportional to its eco
nomic activity
China's energy/GDP elasticity and energy inten-
sity of major manufactured goods are too high com-
pared with corresponding figures of other countries.
Namely, coexistence of energy oversupply and waste-
ful energy use can best explain China's supply and
demand relation.
(2) Coal-dominant energy consumption mix
As of 1998, coal is responsible for 72.0% of
China's energy production mix, and 71.6% of con-
sumption mix. Compared with 1985 records, the
share in the production mix remains virtually un-
changed (72.8%), but that in the consumption mix
shrank by 4.2%. The contraction is attributable to
greater use of oil and hydro.
(3) Electricity shortage solved in the short run

Fig. 1-6 China’s Primary Energy Consumption

(Unit: 10,000 tons coal equivalent) (Unit: %)
140,000 8
Up/down from a year ago Hydro power
7 水力発電
(right graduations) generation
120,000 6
Natural gas
天然ガス
5
100,000
4 Oil
石油
3
80,000 Coal
石炭
2
1
60,000
0

40,000 -1
-2
20,000 -3
85 86 87 88 89 90 91 92 93 94 95 96 97 98

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.
 As a result of continued power development ef-
forts in an attempt to eliminate an electricity short-
age that became conspicuous in the mid-1980s, China
expanded its installed capacity to 250 GW by late
1997. Total generated output also reached 1,132
TWh, the world's second highest level. Based on its
projection that electricity demand will keep growing
constantly ahead, the Chinese government set forth
in its long-range plan the targets to increase the in-
stalled capacity and generated output to 550 GW and
2,800 TWh, respectively, by 2010.
Over the decade from 1985 to 1995, China's GDP
grew by 9.9%/year on average, while the growth of
electricity consumption averaged 9.3%/year. These

Table 1-2 Primary Energy Production and Consumption Trends

1985 1986 1987 1988 1989 1990 1991 1992
Production Coal MTCE 623 638 663 700 753 771 777 797
Share % 72.8 72.4 72.6 73.1 74.1 74.2 74.1 74.3
Oil MTCE 179 187 192 195 196 197 201 203
Share % 20.9 21.2 21.0 20.4 19.3 19.0 19.2 18.9
Natural gas MTCE 17 185 18 19 20 21 21 21
Share % 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0
Hydro MTCE 37 379 40 43 47 50 49 51
Share % 4.3 4.3 4.4 4.5 4.6 4.8 4.7 4.8
Total MTCE 855 881 913 958 1016 1039 1048 1073
Growth % 6.06 930.14 ▲ 89.64 4.97 6.09 2.25 0.89 2.30
Domestic consumption Coal MTCE 581 613 660 709 737 752 790 826
Share % 75.8 75.8 76.2 76.2 76.0 76.2 76.1 75.7
Oil MTCE 131 139 147 158 166 164 177 191
Share % 17.1 17.2 17.0 17.0 17.1 16.6 17.1 17.5
Natural gas MTCE 17 19 18 20 19 21 21 21
Share % 2.2 2.3 2.1 2.1 2.0 2.1 2.0 1.9
Hydro MTCE 38 38 41 44 47 50 50 53
Share % 4.9 4.7 4.7 4.7 4.9 5.1 4.8 4.9
Total MTCE 767 809 866 930 969 987 1038 1092
Growth % 4.93 5.44 7.15 7.35 4.23 1.82 5.15 5.19

1993 1994 1995 1996 1997 1998 95/85 98/95

Production Coal MTCE 822 886 972 997 981 893 4.55 ▲ 2.78
Share % 74.0 74.6 75.3 75.2 74.1 72.0
Oil MTCE 208 209 214 225 229 229 1.82 2.31
Share % 18.7 17.6 16.6 17.0 17.3 18.5
Natural gas MTCE 22 23 25 27 28 30 3.66 6.67
Share % 2.0 1.9 1.9 2.0 2.1 2.4
Hydro MTCE 59 70 80 77 86 88 8.08 3.24
Share % 5.3 5.9 6.2 5.8 6.5 7.1
Total MTCE 1111 1187 1290 1326 1324 1240 4.20 ▲ 1.32
Growth % 3.55 6.91 8.68 2.78 ▲ 0.16 ▲ 6.35
Domestic consumption Coal MTCE 866 921 979 1038 988 974 5.35 ▲ 0.16
Share % 74.7 75.0 74.6 74.7 71.5 71.6
Oil MTCE 211 214 230 250 282 269 5.76 5.46
Share % 18.2 17.4 17.5 18.0 20.4 19.8
Natural gas MTCE 22 23 24 25 23 29 3.42 6.55
Share % 1.9 1.9 1.8 1.8 1.7 2.1
Hydro MTCE 60 70 80 76 86 88 7.85 3.38
Share % 5.2 5.7 6.1 5.5 6.2 6.5
Total MTCE 1160 1227 1312 1389 1382 1360 5.52 1.21
Growth % 6.25 5.81 6.88 5.92 ▲ 0.56 ▲ 1.57

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.
put elasticity of electricity consumption at 0.9. But,
since 1996, the growth of generated output and GDP/
electricity elasticity set to decline. Stagnated eco-
nomic activity and structural shifts, notably falling
weight of energy-intensive industries, can be cited
as major causes of the decline. In 1996 and 1997,
the electricity consumption growth slowed down to
5.3% and 4.8%, respectively.
(4) Intensifying oil shortages day by day
In 1990 - 1996, China's oil consumption grew
by 7.2%/year on average. Incremental consumption
averaged 9.92 million tons a year. Elasticity of oil
consumption was 0.62, staying above that of primary
energy consumption (0.51). On the other hand, oil
production grew by a mere 2.2%/year on average, or
3.17 million tons in absolute terms. The annual av-
erage growth of oil production stays much lower than
that of oil consumption. As of 1998, oil shares in
China's energy production and consumption mixes
stood at 18.5% and 19.8%, each. Compared with
1985 records (20.9%, 17.1%), oil has its share in
energy production shrinking by 2.1%, and that in
consumption mix swelling by 2.7%.
Given the status quo that oil production grows
much slower than oil consumption, China has no
choice but to trim oil exports and increase oil im-
ports in hopes to satisfy growing domestic oil de-
mand. In 1993, with imports outstripping exports,
China slipped from an oil exporter to a net oil im-
porter. In 1997, China's net imports of crude oil and
petroleum products amounted to 15.64 million tons
and 18.20 million tons, respectively (Fig. 1-7).
The considerable shortage of oil supply has al-
ready become a crucial impediment to China's eco-
nomic development. Lack of additional resources
that can replace already produced or consumed oil is
the principal cause of the delays in the oil industry
development.
(5) Consuming areas located distant from energy
supply sources
Nearly 80% of energy resources are distributed
in the western or northern parts, while 60% of en-
ergy consumption concentrates in the southeastern
part, especially the coastal areas.
(6) Per capita energy consumption staying below the
world's average

Table 1-3 Final Energy Consumption Mix by Sector

1980 1985 1990 1995 1996
Energy consumption (MTCE) 603 767 987 1312 1390
(1) Production sector （％） 81.1 79.4 80.5 84.5 83.3
Agriculture/forestry/fishery （％） 5.8 5.3 4.9 4.2 4.1
Manufacturing （％） 68.0 66.6 68.5 73.3 72.2
Construction （％） 1.6 1.7 1.2 1.0 1.0
Transport/communications （％） 4.8 4.8 4.6 4.5 4.3
Commerce/services （％） 0.9 1.0 1.3 1.5 1.6
(2) Non-production sector （％） 3.0 3.2 3.5 3.4 3.9
(3) Living/consumption （％） 15.9 17.4 16.0 12.0 12.7

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.

Fig. 1-7 China’s Oil Export and Import Balances

(Unit: 10,000 tons) (Unit: 10,000 tons)
6,000 4,000
Exports (left graduations)
4,000 3,000

2,000
2,000

1,000
0
0
-2,000
-1,000

-4,000
-2,000
Imports (left graduations)
-6,000 -3,000
Balance (right graduations)

-8,000 -4,000
85 90 91 92 93 94 95 96 97 98

(Source) Prepared by IEEJ from ÅgChina Statistical Yearbooks,Åh each year edition.
 China's per capita energy consumption, 734 kg
(coal equivalent) in 1985, increased to 1,141 kg by
1996, up 1.6 times over the decade. Yet, the 1996
figure still remains at the world's average level in the
early 1950s.
Also, in 1996, China's per capita electricity con-
sumption was 884 kWh. Its average electricity con-
sumption in living, still under 100 kWh, stays much
below the world's average.
1-4 China's energy demand outlook in the
medium and long run
For reference, "China's Long-term Energy Strat-
egy" released by the Energy Research Institute of
China is briefly introduced here. This publication
puts China's primary energy domestic supply at 2.03
billion tons (coal equivalent) for 2010, and 3.44 bil-
lion tons for 2030. Coal share in total domestic sup-
ply is projected to shrink from around 72% at present
(1998) to 65%-strong by 2010 and further to 62% by
2030. On the other hand, oil and natural gas are pre-
dicted to have growing demand. Hydro and nuclear
development is expected as well (Table 1-4).
2. Present Coal Supply and De-
mand Situation in China
In recent years, China's coal supply and demand
balance has been collapsing. Its supply and demand
relation can be characterized as follows (Fig. 2-1).
2-1 Characteristics on supply side
(1) Greater output sent the coal market heading for
oversupply.
In 1994 China's coal (raw coal) output reached
1.2 billion tons. It means China attained its target,
namely to boost coal output 1.2 times over 1985
records of 1.0 billion tons by the end of this century,
six years earlier than stated in the government's long-
range plan. Coincidentally, the recession, among
others, precipitated an ill balance of coal supply and
demand and a gradual formation of a buyer's market.
Coal stocks held by individual industries have in-
creased year by year and reached 200 million tons in
1998, compared with some 1,250 million tons of coal
production in that year.
(2) The coal industry changed in structural terms.
Production by the state-owned priority mines has
been sluggish, up only by 0.08%/year on average
during the eighth five-year plan. On the other hand,
local mines, particularly municipal ones, have re-
corded sharp output increases, up 6.22%/year on av-
erage. In 1990 the shares in coal output among the
state-owned priority mines, state-owned local mines
and municipal mines were 45: 19: 36, which turned
to be 37: 17: 46 by 1996. According to the "China
Coal Journal," China had a total of 62,000 mines at
1997 yearend. Of them, 54,000 mines were munici-
pal ones.
(3) Coal-producing areas still concentrate in the west,
but area-by-area growth sets to change a little.
Shanxi Province is still an important coal-pro-
ducing area in China and responsible for 25.2% of
China's total coal output in 1998. Yet, in recent years,
its annual average growth has been decelerating.
From 1990 through 1998, coal production in Shanxi
grew 1.2%/year on average, 0.7 points lower than
the national average of 1.9%.
2-2 Characteristics on demand side
(1) Coal consumption growth decelerated.
The coal consumption growth of China, having
averaged 5.4%/year in 1985 - 95, slowed down to an

Table 1-4 China’s Energy Demand Outlook by Source

Actual Outlook
1995 2005 2010 2020 2030
Primary energy demand total 1,312 1,770 2,030 2,660 3,440
(Share %) 100 100 100 100 100
Coal MTCE 983 1,232 1,321 1,630 2,146
(Share %) 74.93 69.62 65.06 61.28 62.37
Oil MTCE 230 339 397 521 620
(Share %) 17.50 19.17 19.57 19.59 18.01
Natural gas MTCE 24 67 133 239 266
(Share %) 1.80 3.76 6.55 9.00 7.73
Hydro MTCE 71 116 141 193 295
(Share %) 5.40 6.57 6.94 7.27 8.56
Nuclear MTCE 5 16 38 76 114
(Share %) 0.37 0.89 1.87 2.87 3.32

(Source) Prepared by IEEJ from the Energy Research Institute of China, ÅgMedium- and Long-term Energy Strategy of China.Åh
 Fig. 2-1 Characteristics of Coal Supply and Demand Shrinking demand

Shrinking demand Growing supply

* Recession and poor operating rate of the heavy industries * Greater production capacity than demand was built
* Increased hydro power generating capacity up under the planned economy.
* Effects of energy conservation, industrial structural * An increasing number of local, municipal and private mines
adjustment, worsening environmental problems * Continuing maldistribution of producing areas

Supply and demand imbalance

Demand-side problems Supply-side problems

* Choice of suppliers and coal qualities * Mounting stocks, weak coal prices
* Intensifying unfair competition * Growing arrears
* Administrative intervention, local protectionism * Red-ridden management of state-owned enterprises

Policies and measures

* Administrative reforms ： The Coal Industry Ministry was restructured into the Coal Industry Bureau
(to integrate functions and separate administration from business).
* Transfer of state-owned priority mines to local governments
： All of 94 centrally controlled mines were transferred to the local governments.
* Closures of illegal mines： By 1999 yearend, the government plans a 200-million-ton production cut by
closing 25,800 municipal mines illegally in operation.
* Limited production by state-owned priority mines and state-owned local mines
* Prohibition of new mine construction by 2000

(Source) Prepared by IEEJ from the Chinese newspapers, including theÅgChina Coal JournalÅhand theÅgPeople's Daily.Åh

average 3.3%/year in 1995 - 97. Correspondingly,
elasticity of coal consumption has been on the de-
cline year after year, down from 0.57 in 1985 - 95 to
0.44 in 1995 - 97.
(2) Residential & commercial coal consumption, no
tably agriculture, forestry, cattle-breeding and
fishery, kept falling.
Table 2-1 shows that, in 1996, agriculture, for-
estry, cattle-breeding and fishery consumed 8.5% less
coal than in 1990, and pushed residential & com-
mercial coal consumption down by 13.8%. On the
other hand, industrial coal consumption has been on
the constant rise and remained as the principal coal
consumer. In 1996 the industrial sector accounted
for about 85.6% of total coal consumption, up 8.8%
over 1990 records.
(3) Final consumption heads for stabilization.
During the eighth five-year plan (1990 - 95), fi-
nal consumption of coal (raw coal) grew 1.9%/year
on average. Its share in total coal consumption shrank
from 57.1% (1990) to 48.1% (1995). On the other
hand, coal consumption in the energy conversion
sector kept growing and already outstripped the fi-
nal consumption. Particularly coal use in electricity
production increased considerably and already held
33.7% of total coal consumption in 1996 (Table 2-2).
2-3 Characteristics of supply and demand
relation
These years, the coal market, too sluggish to lessen
coal stocks, has become a buyer's market, whereby
the positions of supply and demand on the market
have reversed. The reversion is manifested largely
in following points.
* On demand side, buyer's psychology is calm. Not
hasty in buying, the buyers have many options in
quality, price, contract partner, etc. Also, an emerg-
ing trend is that buyers insist that coal stocks should
be held on supply side.
* Competition gets fiercer on supply side. In re-
sponse to the market's requests, improvements
were made in such points as supply method, qual-
ity and after-sales service warrants. Meanwhile,
despite defaults in payment having occurred many provinces started protecting local suppliers
among funds-stricken major users, typically elec- by restricting coal buying from outside the prov-
tric utilities, coal producers are continuing coal inces.
supplies to them simply for fear of losing users * The coal price is falling and sets to squeeze prof-
and market. Under such circumstances, unpaid itability. Fig. 2-2 shows that, in 1998, the price
coal prices have been mounting. As of late Febru- for Datong coals from Shanxi at Quinhuangdao, a
ary 1999, the arrears reached 30.3 billion yuan for leading transit terminal, plunged sharply by an
the state-owned priority mines alone. Moreover, average 31 yuan/ton from 1997 levels.
Table 2-1 Final Coal Consumption by Sector
単位 1980 1985 1990 1995 1996
Coal consumption (MTCE) 610 816 1,055 1,377 1,447
(1) Production sector (％) 79.2 78.9 82.3 88.7 88.8
  Agriculture/forestry/fishery (％) 2.5 2.7 2.0 1.3 1.3
  Manufacturing (％) 71.9 71.8 76.8 85.4 85.6
  Construction (％) 0.9 0.7 0.4 0.3 0.3
  Transport/communications (％) 3.2 2.8 2.0 1.0 0.8
  Commerce/services (％) 0.7 0.9 1.0 0.7 0.7
(2) Non-production sector (％) 1.8 1.9 1.9 1.4 1.3
(3) Living/consumption (％) 19.0 19.1 15.8 9.8 9.9

(Source) Prepared by IEEJ from Chinese Statistics Publications, ÅgChina Statistical Yearbook,Åh 1998 edition.

Table 2-2 Coal consumption and Shares by Consuming Sector

In absolute numbers Growth
1980 1985 1990 1995 1996 '90/85 '95/90
Coal consumption (MTCE) 610 816 1055 1377 1447 5.3% 5.5%
 Final coal consumption (10,000 TCE) 38,804 52,704 60,206 66,156 68,454 2.7% 1.9%
(Share) (％) (63.6) (64.6) (57.1) (48.1) (47.3)
  Incl. Industrial (10,000 TCE) 21,643 29,715 35,774 46,050 47,605 3.8% 5.2%
(Share) (％) (35.5) (36.4) (33.9) (33.4) (32.9)
 Energy conversion (10,000 TCE) 19,462 25,397 41,258 69,488 74,212 10.2% 11.0%
 Electricity generation (10,000 TCE) 12,648 16,441 27,204 44,440 48,809 10.6% 10.3%
(Share) (％) (20.7) (20.1) (25.8) (32.3) (33.7)
 Heat supply (10,000 TCE) 1462.3 2995.5 5887.3 6365.7 15.4% 14.5%
 Coke production (10,000 TCE) 6682.2 7303.8 10697.6 18396.4 18455.8 7.9% 11.5%
 Gas production (10,000 TCE) 131 190.6 360.4 763.7 582 13.6% 16.2%
 Conversion losses (10,000 TCE) 2743.7 3501.2 4059.3 2032.8 2068.8 3.0% -12.9%

(Note) The (Share) represents that in total coal consumption.

(Source) Prepared by IEEJ from Chinese Statistics Publications, ÅgChina Statistical Yearbook,Åh 1998 edition.

Fig. 2-2 Coal Price Trends

(Unit: yuan/t)
250
Datong blends
240

230

220

210

200

190
Shanxi blends

180

170
Jul97
Aug97
Sep97
Oct97

Nov97
Dec97
Jun98
Feb98

Mar98

Apr98
May98
Jun98

Jul98

Aug98
Sep98
Oct98

Nov98
Jul.97

Aug.97
Sep.97

Oct.97

Nov.97
Dec.97

Jan.98

Feb.98
Mar.98

Apr.98

May.98
Jun.98

Jul.98

Aug.98
Sep.98

Oct.98

Nov.98

(Note) When coals are sold by getting already processed coals mixed with raw coals for a heat value adjustment, they are called blends.
(Source) Prepared by IEEJ from the Japan-China Energy Exchange Forum, ÅgJapan-China Energy Prompt Report.Åh

3. China's Coal Supply and De-
mand Factor Analysis and Outlook
3-1 Factor analysis of coal market fluc-
tuations (Fig. 3-1)
3-1-1 Coal demand restraints
(1) Industrial structural shifts
Industrial structural shifts have a crucial power
to influence an overall demand size on the coal mar-
ket. China in its long-range economic development
plan projects that its industrial structural mix (pri-
mary: secondary: tertiary industries) will shift from
23: 48: 29 (as of 1995) to 14: 38: 48 (by 2010). These
structural shifts, if becoming real, should contribute
to curbing coal demand.
(2) Change in the government's economic manage
ment system
This can be manifested largely in following
points.
* Changing corporate behaviors
Corporate management will be left to the greater-
ever discretion along with the lesser administrative
involvement. Market will have a crucial influence
on corporate behaviors, and to pursue maximization
of corporate earnings will become the basic principle
of decision-making among the corporate executives.
This flow can change many firms' conventional man-
ner of energy selection.
* Improvement of economic efficiency
More intensive management will obviously im-
prove the level and quality of economic operation
society-wide. Also, cooperation among different
firms based on specialization & division of labor,
enlargement of corporate scale, and a growing im-
portance of technology development for individual
firms, among others, will help increase economic
efficiency society-wide. On these accounts, energy
demand (energy intensity) of the society is likely to
Fig. 3-1 Factor Analysis of Coal Demand Fluctuations
Coal demand constraints
◎Industrial structural shifts
◎Government's shift in economic management system ◎Growing electricity demand
 ・Changing corporate behaviors
 ・Improved economic efficiency
 ・Adjustment of energy structure
 ・Coal price fluctuations
 ・Effects of energy conservation
 ・Worsening ecological environment
 ・Establishment of coal market
(Source) Prepared by IEEJ from the Chinese newspapers, including the ÅgChina Coal Journal.Åh
diminish.
* Adjustment of energy structure
Energy structural shifts resulting from China's
energy policy adjustment can have a certain impact
on coal demand as well. For example, coal share on
the domestic energy market is likely to shrink to some
extent in reflection to various structural changes.
They include large-scale oil and natural gas explora-
tion, development and transportation in the west,
nuclear power plant construction in the coastal dis-
trict, overseas cooperation in energy resource devel-
opment, and the government's energy import poli-
cies, including the choice to import energy-intensive
products.
* Coal price fluctuations
While rising domestic coal prices will slash de-
mand, narrowing domestic and international coal dif-
ferentials can boost coal imports. At the same time,
as the differentials between coal and alternative en-
ergies get slimmer, growing demand for alternative
energies is likely. However, excluding some sectors,
equipment and industries, rises in the coal price can
be capped somehow.
* Excavation of energy conservation potentials
At present China's energy efficiency stands much
below the industrialized countries' records. The En-
ergy Research Institute of China puts in its publica-
tion that, if China's energy use became as efficient as
present international levels, the country could save
1.29 billion tons (coal equivalent). Among others,
quality improvement of coal products can also in-
crease energy efficiency greatly and send coal con-
sumption shrinking.
* Coal use discouraged by environmental problems
China's coal-dominant energy production and
consumption mixes have been causing very grave en-
vironmental problems. As these problems attract
growing concerns in the international community and
China commits to sustainable development strategies,
environment is likely to pose the most important fac-
Coal demand stimulants
◎Economic recovery
◎Construction of the basic industries
 ・Steel
 ・Automobiles
 ・Building materials, etc.
◎Modernization of agriculture
◎Growing residential & commercial energy use
◎Clean coal technology development
tor to discourage coal demand. For instance, major
cities, like Beijing, Shanghai, Hangzhou, Nanjing and
Guangzhou, have introduced ceilings of coal con-
sumption in their effort to mitigate environmental
problems. Nationwide designation of model districts
for SO2 & acid rain control can also limit coal pro-
duction and consumption considerably.
* Development of market
As progress in contract-based market trading and
its standardization prompts the formation of new coal
trading & sale-on-commission systems, the interme-
diate influencing power can be weakened day by day.
Simplified trading routes, combined with increased
trading efficiency, can streamline coal distribution
processes and allow considerable stock cuts at indi-
vidual stages. Resultant shortening of coal distribu-
tion time & delays is likely to lessen coal demand in
all domains of the society.
3-1-2 Coal demand stimulants
The process of China's economic development
still contains many factors that can spur incremental
coal demand. The stimulants are likely to keep af-
fecting the Chinese coal market for years ahead.
(1) Historical necessity in the industrialization pro
cess
Indicators of China's economic development
show that the country still stays at the early stage of
industrialization. According to a study made by the
Chinese State Development Planning Committee,
China's industrialization finally graduated from the
light-industry stage and just entered the heavy-chemi-
cal-industry stage, the latter likely to last well into
the 21st century by 2030. The heavy-chemical-in-
dustry stage can be defined as the stage where indus-
trialization is led by the development of the capital-
intensive basic industries, energy & raw materials
industries and the like. This stage involves still huge
amounts of energy demand.
(2) Shifts from traditional to modern agriculture
Today, the growth potentials of traditional agri-
culture already hit the limit. As farming shifts in-
creasingly to modern agriculture of energy-intensive
type, agricultural production is expected to become
more energy-dependent than ever. Pressures of the
need to feed 1.2-billion population can accelerate this
process, and boost agricultural energy demand fur-
ther.
(3) Structural adjustment of economic growth
In the last decade and a few years, China's GDP/
energy elasticity has kept falling. Indeed, an analy-
sis of the growth-process structure discloses that the
rise of the light industries has formed the mainstream
of China's economic growth from the 1980s to date.
Objectively it was a defective result from inactive
consumption, largely due to the deformed develop-
ment of heavy industries during the preceding thirty
years, and from a false step taken in the economic
growth stages.
The roaring development of least-energy-inten-
sive processing industries during the 1980s and the
bubble economy inflated by the real state develop-
ment, the overheated stock market, etc. are the pri-
mary causes that sent GDP/energy elasticity down.
But, the development of China's basic industries has
not completed yet. Sooner or later, the country will
reach a stage where the growth of the basic indus-
tries forms the mainstream. This stage no doubt will
last longer, and thus place potential and colossal pres-
sures on energy supply in China.
(4) Improvement of per capita average income level
Japan's experience during the economic devel-
opment showed that an improved average income
level inevitably increased per capita energy consump-
tion, particularly electricity use. As of 1996, China's
per capita GDP was a mere US$640, per capita en-
ergy consumption 1,141.2 kg (coal equivalent), and
per capita electricity use 884.1 kWh. Once China
succeeds in its economic reforms, per capita energy
and electricity consumption no doubt sets to mount
by 2010 along with rising average income levels.
(5) Development and utilization of clean coal tech
nologies
Development & utilization of clean coals as well
as innovation & variation of clean coal transport tech-
nologies are expected to tap new markets for coal
use, greatly broaden the domains of coal consump-
tion, and spur rising coal consumption under ratio-
nal pricing conditions.
3-1-3 Crucial determinants on coal supply
Listed below are major factors that have a cru-
cial impact on China's coal supply in the years to
come. When making a coal supply and demand fore-
cast, these factors must fully be taken into account.
* Investment values and priorities of coal resource
exploration & extraction
* Progress in construction of transport systems, prin-
cipally railways and seaports.
* Costs and earnings of domestic coal production
and resultant market price trends
3-2 Coal supply and demand outlook
Given the analysis results described so far, plus
the latest supply and demand situation in China, the
country's coal supply and demand, both in the short
term and medium and long run, can be projected as
follows.
3-2-1 Short-term coal supply and demand
forecast (up to 2000)
Given the status quo of China's economic de-
velopment, the issue of its joining the WTO and the
economic situations in Asia regionwide, the govern-
ment shifts its economic management system from
planned- to market-led types and its economic growth
system from nonintervention to intensive types.
Then, the strong likelihood is that the Chinese
economy within the next 1 - 2 years will undergo the
process of institutional reforms and organizational
restructuring & revamping. Particularly the state-
owned enterprises appear not able to get out of dol-
drums in the short run. Along with institutional re-
forms and the shifting economic growth system, new
industrial structural adjustments, already initiated, are
likely to last well into the year 2000 onward.
In this way, the Chinese economy is likely to
show neither a sparkling development nor an amaz-
ing slump in the short run. Thus, during this period,
few drastic changes in coal demand are foreseen ei-
ther.
On supply side, the central government's coal
industry ministry, as well as relevant offices of ma-
jor coal-producing provincial and autonomous-dis-
trict governments are taking administrative measures
to close some mines and/or curtail coal production
at priority mines and local mines. Even the provin-
cial and autonomous-district governments of which
coal production and consumption is well-balanced
within their jurisdiction commit to mine closures
when necessary.
On the other hand, however, in order to secure
earnings amid an increasingly pluralistic shape of
production, supply and marketing, individual coal
concerns are showing their own moves in executing
mine closures. They are also extremely eager for
Fig. 3-2 Short-term Coal Supply and Demand Outlook
Demand
◎The Asian economy to revive→From 2000 onward
・Recession of export industries
・Shrinking foreign investments
◎Recession of the Chinese economy
・State-owned enterprises to keep languishing.
・Sluggish domestic demand
・Reconstruction of financial system→ Falling investments
◎Impact of environmental problems
<Supply-side problems>
1. Will the policy to shut down 22,000 municipal mines (incl. private ones) be advanced as planned?
2. Can production curtailment at the state-owned mines be implemented?
3. What will be local protectionism?
(Source) Prepared by IEEJ from the Chinese newspapers, including the ÅgChina Coal Journal.Åh
getting the market split and grabbing a share for them-
selves.
Meanwhile, because of their independence and
flexibility in management, many municipal mines are
located outside the scope of supply-demand adjust-
ments, typically mine closures. This fact may con-
tribute to the security of coal supply as well. On
these accounts, no drastic changes are likely on coal
supply side either.
These analysis results put China's coal demand
in 2000 flat at 1998 records, or an estimated about
1.1 billion tons (Fig. 3-2).
Thus, a sense of coal gluts, conspicuous since
the early 1998, is likely to linger for a while.
3-2-2 Medium- and long-term coal demand
forecast (up to 2010)
From the medium- and long-range standpoints,
the development of the Chinese coal market is likely
to show following characteristics and trends.
(1) Coal supply capacity still has relatively large po
tentials, but contains many problems as well.
As of late 1993, China's state-owned priority
mines produced only 447 million tons, compared with
their assessed capacity at 507 million tons. For years,
the limited transport capacity has impeded many
mines from demonstrating their coal production ca-
pacity (equipment).
According to the Chinese data, the "three west-
ern districts (Shanxi, Shanxi, Nei Mongol)" currently
have at least 40 - 50 million tons of their production
capacity idle due to lack of transport capacity. There-
fore, judging from such a potential capacity at mines,
China seems to have few big difficulties in its coal
supply capacity in the near future.
Supply
◎Closures of municipal mines illegally in operation.
◎Production curtailment at state-owned priority mines.
◎Difficulties in advancing capacity modernization.
・Red-ridden management of state-owned priority mines
・Increasing difficulties in collecting the prices for coal
Coal demand：1.1 billion tons
 In the longer run, however, coal supply still con-
tains many problems. For example, the state-owned
priority mines have long failed to make sufficient
investments in technology innovation. Many local
and municipal mines on their part had their mining
cost getting so high that they should find output in-
creases difficult ahead.
(2) A new phase featuring the north to export and
the south to import is likely to emerge.
The shift in economic management system
spurred prudent consideration of trading terms, such
as the price, quality and supply warrant on demand
side. As a result, an increasing number of the prov-
inces on the southeast coast came to prefer overseas
supply sources. This move toward coal imports is
likely to intensify ahead. The north on its part is
expected to continue the effort for export expansion
by taking advantage of such convenient conditions
as ports and transportation.
(3) Total demand is likely to remain constant and
keep growing.
In the medium and long run, China's coal de-
mand will be on the rise still. Many forecasts put
that the shifts in economic system and its manage-
ment system would allow the Chinese economy, af-
ter a few years of adjustment period, to enter a new
growth period from the early 21st century. The higher
per capita income and consumption structural adjust-
ment will consequently require a higher-ever growth
of the basic industries, which inevitably creates
greater energy demand.
At home China has large-scale projects of oil &
gas exploration and hydro & nuclear development
under way. But, given not a few constraints, the like-
lihood is that these alternatives could hardly replace
a massive portion of coal demand for years ahead.
Thus, in the medium and long run, pressures of coal
demand will remain colossal.
(4) Demand mix is likely to unveil rather conspicu-
ous imbalances.
In specific terms, the imbalances will take fol-
lowing forms.
* Coal consumed in electricity generation is likely
to hold a massive portion of overall coal demand,
up from 33.7% at present to 45% by 2010 ("Re-
port on China's Energy Development).
* In geographic structural terms, China's coal-con-
suming markets are still located in the districts of
East China, Central South and Beijing・Tainjin・
Hubei Province. By 2010, their coal demands are
projected to total 354 million tons, 250 million tons
and 152 million tons, respectively, and account for
26.2%, 18.5% and 10.8%, each, of nationwide coal
demand.
* In coal rank terms, steaming coal demand will be
on the constant rise largely as electricity generat-
ing fuels. By 2010 installed fossil-fired capacity
is expected to reach 550 GW and annual coal con-
sumption 940 million tons. On the other hand,
anthracite consumption is likely to inch down, then
get stabilized at a certain level.
* The coal price is likely to take an "upward course
though remaining stable somehow." This trend
will become conspicuous particularly among good-
quality coals, short-supply coals and processed
coals. Yet, the scope of rises won't be so large. As
the gradually rising cost of domestic coal produc-
tion & management leads to growing coal imports
& exports, the links will be deepened between the
domestic and overseas coal markets. From the
medium- and long-term standpoint, too, the dif-
ferentials between domestic and overseas coals
tend to get narrowing. As a result, the strong like-
lihood is the price will fluctuate in reflection to
supply and demand relations on both the domes-
tic and overseas markets.
Based on these analysis results, China's coal de-
mand in 2010 will get back to 1996 levels and stay at
an estimated 1.3 billion tons or so. This means, as of
2010, the recurrence of worsening short supply of
coal is least likely.
Conclusion
China's energy supply and demand in the future,
particularly coal supply and demand, involves too
many uncertainties to make a forecast. The forecast
on China's coal production and demand in this re-
port is based on the first-hand survey data and rel-
evant literature study results. While having many
problems both on supply and demand sides, China's
coal supply and demand and its coal industry are ex-
pected to undergo several drastic changes from now
on. In the short run, coal demand is likely to keep
shrinking, which in turn will squeeze the coal indus-
try. Above all, it will inevitably worsen the manage-
ment of already ailing state-owned priority mines.
In the long run, environmental problems and indus-
trial structural shifts will no doubt prompt the away-
from-coal moves and help expand oil & natural gas
imports.
If advancing as it is now, China would have no
choice but to curb its coal use. Then, China will be-
come dependent-ever on energy imports from over-
seas. Given such a future shape of China and its
impacts on Japan's energy supply and environmen-
tal issues, to advance clean coal technology devel-
opment & dissemination projects for China is a mat-
ter of increasing importance.
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