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Coal typifies China's reform: It's hard and dirty

Coal is much like China's reform challenge: Hard and dirty. Even as politicians fret about the country's chronic smog, they approved 100 million tonnes of new mining capacity in 2013, six times the amount for the previous year. That will add to the 300 million tonnes or so already due to come on stream in 2014. The habit is proving difficult to kick.

China's coal output has almost tripled since 2000, and, at 3.7 billion tonnes, accounts for half of global supply. The sector is inefficient, fragmented and unsafe. The State Council has vowed to shut at least 2,000 of the 12,000 mines, and be more sparing with approvals for new ones. CLSA estimates 300 million tonnes of Chinese coal supply was withdrawn from the market in 2012, compared with peak second-quarter production levels, as the price fell.

But history and geology are in coal's favour. The stuff is abundant, and more reliable than hydroelectric or wind power. Chairman Mao proclaimed smoke stacks a symbol of progress. Meanwhile, companies are still investing: Shaanxi Coal, one of the biggest producers, kicked off a 9.8 billion yuan ($1.6 billion) share offer on January 10.

If the authorities are serious about cleaning China, deeper reforms are needed. Local governments have little incentive to enforce closure of inefficient mines, only to see smarter new facilities built in someone else's town. Curbs on imports of the dirtiest varieties may just serve to keep low-quality domestic producers alive.

The other issue is demand is itself a by-product of rapid growth. Industrial users, such as cement, steel and aluminium producers, guzzle three-quarters of China's electricity, most from coal. For consumption to stop expanding, GDP growth would need to dip well below China's estimated 7.6 per cent growth in 2013.

A soot-free China, thus, remains a distant dream. Even if use peaked in 2015, as Citi analysts suggested in September, the country would still need 3.8 billion tonnes - half of what the world used in 2012. The grimy truth is that coal remains China's energy source of last resort.