Coal

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Coal
Jason Zhong Ron Huang
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Introduction

• Coal is a nonrenewable energy source.
• Its a combustible black or brownish-black rock
  composed mostly of carbon and hydrocarbons.
• However, Its 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.

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Introduction

• 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.

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Project 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
• Valuation
• Cost (ex total investment cost, transportation
  cost)

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Coal Production and Consumption In 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?
  
• Whats the exact number of coal produced and
  consumed in China?
• Whats world position of Chinas coal industry in
  terms of producers and consumers?

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As Percentage of Total Energy Production
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As Percentage of Total Energy Consumption
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Why Less Consumption?

• Its 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 didnt decrease.

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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)

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Total Coal Production Total Coal Consumption
In China (1990-2005)
Year 1990 1995 2000 2003 2004 2005
Total Coal Production (10,000 Tons) 102221.0 133461.7 128297.1 163402.0 192265.5 214462.1
Total Coal Consumption (10,000 Tons) 105523.0 137676.5 132000.0 169232.0 193596.0 216557.5
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Top Ten Coal Consumers Countries, 2004( in
million tons)
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Top Three Coal Producers (in million tons)
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Coal, Oil, and Gas Price (us per tons)
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Observations

• 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.

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Does coal help reduce world 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.

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Valuation

• There is a strong Demand for Coal Chinas 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.
• 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

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Mongolia Energy (0276.hk)
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Investing Strategy

• Invest in long position on companies that are not
  popular now, but they will be popular in the
  future. Dont 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.

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Investing 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 dont 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.
  

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Valuation

1. Sustainability Crude oils 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 coals
   reserve will last for 155 years.
2. 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.

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Coal-fired, Wind, Nuclear, and Water power
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Consumption of a few main source of energy in
China
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Which one is more expensive?

• We believe coal is still the cheapest source of
  energy to generate electricity. Lets look at
  different type of methods in generating
  electricity!
• Hydropower use only locally and difficult to
  find an ideal location to
  build a dam.
• 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

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Cost 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 billion 0.25 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 gt 3 billions 0.41 to 0.45 Cents
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Three Gorges Dam example

• Three Gorges Dam is the biggest hydropower in
  China, and its also the biggest construction
  project since the Great Wall. Its power
  generation is equal to 18 nuclear power station,
  and it can satisfy 5 of the Chinese population.
• Whats 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).
• gt1 million local residents had relocate.
• Can they build another one like this?

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Transportation Cost
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Transportation 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. Its
  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.

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Shenhuas Asset Location(1088.hk, 601088.ss)
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SHENHUA ENGY
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Location of All Coal Mines in China
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Location of all railway in China
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Location of All Major Industries in China
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Location of All Major Ports in China
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Observations

• 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.

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Summary

• 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!

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Questions Answers