Energy & Resources

Provocative steppe

Why Shenhua may avoid Mongolian dispute

Provocative steppe

No wonder people are choking on the air. The news this week is that China is now burning almost as much coal as the rest of the world combined (3.8 billion tonnes, or 47% of the worldwide total, according to US government data).

As a result, China’s coal imports are soaring too, up by nearly a third to 220 million tonnes in the first 10 months of last year. The average price paid for this coal was $103.30 a tonne, according to customs data in the Chinese media. That sum will be of interest to the Mongolian government, which is currently in dispute with a major Chinese firm over the price of Mongolia’s coal exports.

The row is the result of a coal-for-loans deal signed last year between Mongolian miner Tavan Tolgoi and Chalco, a Chinese state-owned enterprise. The $350 million deal capped the price of the Mongolian coal Chalco received at $70 a tonne. A new Mongolian government now say the price is too low and they are threatening to cancel the arrangement.

The Mongolian ambassador to Beijing told the Wall Street Journal that the price the Chinese are paying is “unacceptable in the sense of normal international trade”. But Chalco representatives shot back that objections to the terms of the deal were “baseless”, constituted “a unilateral breach of the contract” and could lead to “unlimited monetary damages”.

So far, so straightforward. However, the Wall Street Journal also reports that the Mongolian strategy has an added nuance: the government in Ulan Bator is seeking to play off Chalco – an aluminium behemoth – against state-owned Shenhua, China’s biggest coal miner.

The ambassador told the newspaper that his government was talking to Shenhua, having been unable to reason with Chalco. Comments the Journal: “Mongolia may be hoping Shenhua, which is in the running to develop the western half of Tavan Tolgoi, will work to resolve the impasse with a focus on gaining goodwill in its bid for the project.”

But the timing of the Mongolian gambit isn’t ideal. Why? Shenhua is probably worried by how intervention on its part might look in Beijing – especially if it’s seen as sabotaging another SOE’s contract.

That’s because Shenhua is still smarting from recent punishment by the Ministry of Environmental Protection, which has penalised the coal giant for the unauthorised opening of a new plant. The immediate fine was puny (just Rmb100,000) but the regulators in Beijing also ordered that the facility halt production. It’s the stoppage that really hurts.

The project in question is a Rmb17 billion ($2.73 billion) coal-to-olefins facility in Inner Mongolia, which opened 18 months ago without receiving the requisite approvals from environment officials. That may sound an odd course to take, but Shenhua may have calculated that it could finesse the regulations, using its connections in Beijing to outrank (and outflank) the environmental bureaucrats. In China’s Byzantine power structure this is how things often tend to work.

So Shenhua’s management was probably as surprised by the shutdown order as almost everyone else. China Business News says it is the first time that the environment ministry has applied such a rule to a “mega state-owned project”.

The plant in question uses coal as a substitute for oil in producing raw materials for plastics. But to do so requires large amounts of water: Deloitte’s latest Chemical Quarterly points out that China’s early coal-to-olefins projects consumed 40 metric tonnes of water per metric tonne of olefin produced. Unfortunately the parts of China with the most coal (Inner Mongolia and Shanxi, for example) are struggling with water scarcity. Updated environmental rules – devised in cooperation with the National Development and Reform Commission – state that new coal-to-olefin projects must reduce water usage by 75%. Unless Shenhua can demonstrate its facility hits this target, approval to reopen may face delays.

The Economic Observer calculates that the ongoing shutdown is costing Shenhua Rmb4 million per day (the stoppage order was received January 22).

Shenhua’s public chastisement is illustrative in suggesting that its political capital is not quite as strong as many thought (for more on the company, see WiC167).

It also implies that it will tread carefully in the Chalco negotiation – for fear of risking further ire in Beijing.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.