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Asian Petroleum Review : Jan-March 2011
GREY LAUNDRY On the road into Linfen in the coal heartland of Shanxi province, cars seem to disappear into the dense smog. Midday feels like dusk, with the city shrouded in a murky haze and the sun squinting through a thick curtain of smog. Local workers and residents emerge like ghosts from the gloom. "You can still smell the soot in the air but be- lieve me, it is now a lot better than before, " said Eric Zhang, a Canadian returning to his home town to visit his parents. "White laundry used to turn grey before drying and it was especially bad in winter because every home would be burning coal for heating. " Linfen has topped China's pollution charts since 2006, despite a clean-up campaign launched that year. Hundreds of small mines and factories have been shut, backyard boilers have been de- molished and gas heating has been introduced to more than 85 percent of the city's population, said Yang Zhaofen, director of the city's Environ- mental Protection Bureau. Coal trucks, a major source of dust, have been barred from travelling within a kilometre of the city's boundaries, and overloading is penalised. The mines still open are subject to tougher envi- ronmental standards and fitted with industrial waste water treatment systems, said a manager at one of the privately-owned coal mines in Lin- fen, who was only willing to identify himself by his surname, Li. Yet coal lies everywhere, piled in back alleys and sold in burnable cubes or balls mixed with soil. Efforts to reverse damage caused by decades of over-mining are slow for the farmers in Linfen, a city of 4 million people once known as "the fruit and flower town" of Shanxi, before it was dubbed the world's most polluted city. Meng Zhilu, a 51-year-old farmer living in Kang village near the valley, said their wheat and bar- ley harvests have shrunk over the years and their cotton field is constantly shrouded in grey dust. "The environment may have improved, but the overall situation remains depressing. We are still covered in coal ash after working in the cot- ton fields for a day," he said, fixing his gaze on a nearby coke plant. Collieries destroy arable land and grazing pas- tures, erode topsoil and cause air and water pol- lution. The country's most pressing environ- mental problems - - acid rain, smog, lung dis- eases, water contamination and the filthy layer of black dust that settles on many villages - - can all be traced to coal. According to a World Bank report in 2007, 16 of the world's 20 most polluted cities are in China. Apart from its long-term effects on the environment, mining is also a brutal and perilous profession, and China's chaotic coal sector has long been the most accident-prone of all. China produces around a third of world coal supplies, but is responsible for about 80 percent of global mining fatalities. Illegal mining op- erations account for almost 70 percent of the coun- try's fatalities. China has been cracking down on them, while lifting safety standards at licensed mines. China is also forcing mines to consolidate, aiming to create major mining firms with the working capital to install and run safety equipment, a move that would also reduce accidents caused by different companies operating too close to each other and weakening mine walls. Official statistics show the death rate per mil- lion tonnes of coal produced stood at 2.631 last year, a considerable improvement on 2002, when it reached a peak of 6.995. END OF CHEAP COAL Experts say improving safety and environmental stan- dards for the coal industry can only raise production costs, which have doubled to more than $43 a tonne in the last five years. Transportation costs to move the fuel from the north to the south, which can make up as much as 60 percent of the final delivery price, have also jumped. Moreover, the government is expected to soon intro- duce a coal resource tax of 3-5 percent on coal min- ers, which along with an appreciating renminbi, could also push up prices. Rising costs have in turn pushed up domestic thermal coal prices. Spot prices at Qinhuangdao, China's top coal port, have risen from around $50 a tonne in 2005 to more than $120. Spot prices across the world have soared, with the benchmark Australian globalCOAL Newcastle index reaching a 2010 high of $123.50 at the end of December. As Chinese imports rise, ana- lysts at Standard Chartered are expecting global ther- mal coal prices to rise by 14-20 percent in 2011. The drive for cleaner and low-carbon coal will inevita- bly push costs up even further. Overseas producers and traders alike are betting the efforts to curb pollution and consolidate mines will make imports competitive, opening an arbitrage for coal to sail in from as far away as Colombia and the United States. "The country's coal production could soon re- turn to normal growth levels once Beijing's consolidation drive comes to an end and is forecasting annual output to increase another 1.9 billion tonnes by 2020 to more than 5 bil- lion tonnes a year." - Paul Manley, Wood Mackenzie