CHINA: COAL DEVELOPMENT PLAN FOR THE 1980S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00553R000100130002-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: January 20, 2011
• Sequence Number: 2
• Publication Date: March 1, 1983
• Content Type: REPORT

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Intelligence
China: Coal Development
Plan for the 1980s
An Intelligence Assessment
EA 83-10046
March 1983
Copy 3 2 9
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Directorate of Secret
Intelligence
China: Coal Development
Plan for the 1980s
This assessment was prepared b
Office of East Asian
Analysis. Comments an, queries are welcome and
may be directed to the Chief, China Division, OEA,
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Secret
EA 83-10046
March 1983
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China's coal development program is opening considerable opportunities
for US engineering firms and equipment manufacturers, especially those
willing to invest capital in China. China will export some of the increased
output, but we do not expect it to be a major competitor to US coal, except
iii Secret
EA 83-10046
March 1983
Plan for the 1980s
China's Coal Development
Key Judgments Beijing has embarked upon an investment program designed to nearly
Information available double the cnnntrv'c n i,rra,,f o,,,,,,,,t t _c /'r^ ???
was used in this report. year 2000. Intermediate goals-700 million tons of output by 1985 and
850 million tons by 1990-are decidedly less ambitious. These goals
parallel Beijing's overall economic growth targets and imply a growth rate
of about 3 percent in the 1980s, rising to 4 percent in the 1990s. In view of
the increased priority of coal in Beijing's investment plans, an active
program to attract foreign investment, and new incentives to locally
managed mines that produce almost half of China's coal, we believe the
1985 target will be exceeded. The goals for 1990 and 2000, however, are
Even if these long-range goals are met, China will continue to face an
energy shortage that will restrict the economy's ability to grow. Coal and
the much less important hydroelectric power are the only primary energy
sources slated to increase through the 1980s. China's output of oil and gas
may continue to decline. In effect, a 2-percent growth rate in total energy
supplies will have to support an economy with planned growth at about
4 percent per year.
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China's Coal Development
Plan for the 1980s
Changed Emphasis
China's coal industry was in the doldrums during
1979-81, hard hit by economic retrenchment policies
initiated in 1979. After rapid growth in the second
half of the 1970s, output peaked in 1979 at 635
million tons, then declined to about 620 million tons
in 1980 and 1981 as economic emphasis shifted to
light industry. The industry was also damaged by new
government policies that encouraged investment in
profitmaking industries at the expense of industries,
like coal, that operate at a loss due to low prices
arbitrarily set by the state. State investment in the
industry thus dropped sharply in 1981
Retrenchment, however, now appears over for the coal
industry, and, except for the sensitive price issue,
Beijing appears to be executing a well-coordinated
plan that will permit increased productivity. Output
surged 5 percent in 1982 to a record 650 million tons,
and the Sixth Five-Year Plan (1981-85) goal of 700
million tons in 1985 appears well within reach.F_
The investment allocations outlined in the Sixth Plan,
belatedly released last December, indicate that
growth rates may accelerate in coming years. Coal is
to receive 17.9 billion yuan (approximately $10 bil-
lion) in the current five-year period-32 percent more
than was invested in the preceding period-despite
the fact that overall industrial investment will not
increase. Coal's share of capital construction will thus
rise from 6.1 percent to 7.8 percent. This investment
total includes foreign exchange funds that will be
borrowed for coal mine development, but probably
does not include equity foreign investment that may
add another billion yuan by 1985.
The Sixth Five-Year Plan allocates more than 200
yuan per ton of new capacity, far higher than previous
cost-per-unit allocations. Figures recently released by
China's Statistical Bureau indicate that in the 1970s
the Ministry of Coal spent approximately 100 yuan
for each ton of new output capacity. Capital costs,
however, will be higher because more emphasis is
being placed on mechanization of mines and improved
Coal Production and Exports
000/ Exports
1 1111111111111 I I 1
1970 75 80 85 90 2000
Projected
coal-washing systems. Only 15 percent of China's
mines are fully mechanized, and only 34 percent of
China's coal is now washed. The Japanese estimate,
for example, that it will cost them about $75 or 145 25X1
yuan for each ton of coal capacity that they develop in M
China (see table 2).
If this investment program is implemented and pres-
ent priorities are maintained through the second half
of the 1980s, we believe Beijing could exceed its 1985
~~-~~ Production
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Table I
China's Coal in World Perspective
744
1,300
2. USSR 704
1,100-1,700
3. China 620
1,200-1,300
4. East Germany 266 b
5. Poland 199
World 3,760
Exports
102
51
3. South Africa
4. USSR
5. West Germany
9. China
a Targets are unofficial and likely to be optimistic. US target is by
National Coal Association.
b East Germany only produces brown coal.
target for coal output of 700 million tons and might
exceed the planned targets and reach about 740.
million tons by 1985 and 940 million tons by 1990.
The Development Program
Recent reporting by US officials in Beijing and Hong
Kong has shed considerable light on the strategy
underlying the coal development program, which is
designed to:
? Encourage small mine development to meet local
and short-term coal requirements.
? Significantly expand and develop new state-con-
trolled underground mines-especially in Shanxi,
Shandong, Anhui, and Guizhou Provinces-utiliz-
ing domestic, Japanese, and European financing.
? Open up five very large open-pit mining areas
utilizing considerable amounts of US and European
investment.
Small Mines-New Incentives
China's small, locally administered coal mines pro-
duce approximately 300 million tons a year, a little
less than half the nation's output. Central -government
policy toward these mines has fluctuated over the
years. As recently as 1979 Beijing criticized small
mines for their relatively high cost and poor-quality
output and their inefficient mining techniques, which
fail to recover much of the extractable coal. In times
of real need, however, Beijing has always depended on
local mines to maintain production volume. We sus-
pect that this was the case in 1982 and that much of
the large boost in output came from small mines in
direct response to surging demand by local industrial
consumers.
Beijing is now relying heavily on economic incentives
to promote small-mine development. In July 1982 the
State Council cut taxes on the coal produced by small
mines and urged provincial and local authorities to
raise the price of coal produced from these mines.
Moreover, in contrast to pressure a few years ago to
reduce investments, Coal Minister Gao Yangwen
recently encouraged the provinces to invest more
capital in small-mine development, particularly the
six southern provinces of Zhejiang, Fujian, Hubei,
Hunan, Guangdong, and Jiangxi, which have previ-
ously had to obtain coal from the northern provinces.
Plans disclosed by Zhang Changsong indicate that
small mines are expected to increase output steadily
through the end of the century, although at a slower
rate than large, modernized mines. Output from
existing small mines is targeted to increase by 80
million tons to reach 380 million tons by the year
2000, and new local mines are expected to be produc-
ing 120 million tons a year by that date.
Large Mines-Dependent on Foreign Investment
China's existing state-owned mines, which produced
over 300 million tons last year, are targeted to raise
capacity to about 400 million tons by the year 2000.
This will not be easy, because many of the mines have
been in production for decades and their reserves have
been depleted. This is particularly true of mines in key
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Table 2
Japan Ex-Im Bank-Funded Coal Mines
Coal Mine
Coal Production
Total Investment
Per Ton Investment Ex-Im Bank Funding
(1,000 tons per year) (million US $)
(million US $) (million US $)
FY 1980
FY 1981
Baodian
3,000
195
65
40
35
Jiangzhuang
1,500
120
80
15
15
Xidian
3,000
225
75
45
40
Qianjiaying
4,000
320
80
41
60
Malan .
4,000
300
75
24
20
Zhenchengdi
1,500
112
75
15
10
Sitaigou
4,000
300
75
20
20
Total
21,000
1,572
75
200
200
eastern industrial areas such as Liaoning, Hebei,
Shandong, and Jiangsu where output is already de-
clining. The Ministry of Coal will consequently have
to emphasize expansion of mines in the coal-rich areas
of Shanxi and Inner Mongolia despite transportation
problems associated with ern
and southern consumers
Even if the existing mines meet their plan targets, the
bulk of China's increased output in the 1990s must
come from new mines that are now being planned. For
the first time since the Japanese originally developed
many of China's eastern coalfields in the 1920s,
China is counting on foreign investment to play a
major role. Of the 400-500 million tons of new
capacity that will be available for the year 2000,
100-200 million tons are slated to be developed with
the help of Japanese, US, and European firms. Some
of these deals are still under negotiation, whereas
others are under way
Japanese investors, with substantial help from their
government, are already actively at work in China's
eastern coal mines. Japan's Ex-Im Bank has agreed to
finance approximately $1.6 billion for development of
seven coal mine projects-the loans to be repaid with
coal exported to Japan-and Japan's economic aid
organization is helping fund construction and upgrad-
ing I
of railroad lines and ports to facilitate these
exports. the 25X1
Ex-Im Bank recently turned down a Chinese request
for substantial new credits for the mines because of
concern that China might be counting too heavily on
the Japanese coal market. The mines included in the
Japanese agreement are listed in table 2. Several are
already well into the construction phase, and produc-
tion from these mines may commence by 1987.
Output from these mines, much of which is designat-
ed for export to Japan, is expected to reach 21 million
tons by 2000.
The Chinese are also negotiating with European firms
to develop a major coal area at Liupanshui in south-
ern China. At one point this had been dropped from
the development plan, probably because of its cost.
This project is not being handled by the Ministry of
Coal, but by a new regional corporation-the South- 25X1
west China Energy Resources United Development
Corporation-chartered to help gain Western invest-
ment in the energy resources of China's southern
provinces.
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Shaul Eisenberg, a Tel Aviv-based entrepreneur, has
proposed a plan involving over 120 Western compa-
nies funding development of 29 mines near Liupan-
shui and rail and port systems as well. Some $3 billion
in foreign investment and the equivalent amount in
Chinese funds would be involved in this joint venture,
which would enable annual output to rise from the
current 6.2 million tons to 10 million tons by 1985 and
close to 35 million tons by the late 1990s. The joint
venture would allow export of about 10 million tons
annually to Europe for 10 years to pay the foreign
exchange costs of the project. In our view the plan is
overambitious and will have.to be reduced in scale,
but Eisenberg is making good progress, and some kind
of joint venture is likely.
At least equally important is China's relatively new
focus on large-scale open-pit mines, which currently
produce only 5 percent of the country's coal. Nearly
half-200 million tons-of China's new capacity by
the year 2000 is slated to come from such mines.
Table 3 lists these projects, as described by the
Ministry of Coal. Of particular significance is the
extensive role that the US firms are expected to play
in the development of the open-pit mines. Given the
Chinese demands for capital investment and the
deteriorating financial condition of many US energy
companies, however, these expectations may be opti-
mistic.
One of the largest and most visible projects to date is
the Pingshuo mine in Shanxi Province, which is
expected to yield 15 million tons annually as early as
1986 and reach 45 million tons from three large pits
by the year 2000. This could make Pingshuo one of
the world's largest coal mines. The Ministry of Coal's
China National Coal Development Corporation
signed an agreement with a subsidiary of Occidental
Petroleum-Island Creek Coal-to perform a feasi-
bility study for the initial phase of development that
could cost $300-500 million. Of this, up to $200
million will be spent for imported equipment. The
study will be completed shortly and ajoint-venture
contract signed later this year.
Significant issues remain unresolved, however, and
the Coal Minister recently said Beijing would proceed
without Occidental if an agreement cannot be
reached. The Chinese have not yet worked out an
Table 3 Million metric tons
Open-Pit Mine Projects
Mine Location Capacity Foreign
Participant
1990 2000
Pingsuo Shanxi 15 45 Occidental negotiat-
ing for one of three
Junggar Inner Mongolia 30 60 Bechtel doing feasi-
bility study
Yinminhe Inner Mongolia 20 45 Fluor discussing
project
Huolinhe Inner Mongolia 20 45 West German design
Yuan- Inner Mongolia 8
baoshan
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acceptable system of taxation for the foreign partner,
nor is it clear what financial commitment Occidental
will have to make. 25X1
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The two sides plan to split profits evenly until Occi-
dental recoups its investment. Afterwards, China will
get 60 percent of the profits. Occidental is attempting 25X1
to develop a guaranteed market for its share of the
coal output. Japanese businessmen have noted with
distress that Pingshuo may be in operation before the
seven underground mines now being developed with
Japanese assistance, and that the Japanese market
may not be able to absorb coal from both. 25X1
A second US company, Consolidated Coal, also ex-
pressed interest in Pingshuo's initial phase but lost out
to Occidental. The Ministry of Coal continues to be
unsuccessful in interesting Consolidated in another
pit
Three other large open-pit mining projects, all in
Inner Mongolia, are targeted to come on line by 1990,
and a fourth some time in the 1990s. US firms are
participating in the planning phases of two of them,
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Junggar and Yinminhe, and a West German firm
It is clear, however, that China intends to become an
may help in a third. Total output from these mines,
important coal exporter. Indeed, if the joint-venture
including Pingshuo, is to reach 85 million tons by
projects with Western and Japanese companies pan
1990 and an ambitious 203 million tons by 2000. The
out, foreign investors will be repaid through substan-
Chinese have indicated substantial interest in the
tial exports. Zhang Huiwen, deputy general manager
large-sized trucks and earthmovin a ui ment re-
of the new China National Coal Import and Export
quired for such projects the
Corporation set up to stimulate exports, stated last
Ministry of Coal has been allocated $1 billion in
August that China would triple exports to about 20
foreign exchange to start importing this equipment
million tons by 1985. Others, including the Minister
of Coal, have suggested exports of 40 million tons by
One of the biggest difficulties in developing these
the year 2000. We believe the 20-million-ton target is
mammoth coal areas is the construction of transporta-
too high for 1985, but that it ,could easily be reached
tion systems to carry the coal to the consumers. The
by 1990; 30 or 40 million tons by 2000 is certainly
rail systems in Shanxi, Inner Mongolia, and Hebei
possible. This compares with 1981 US coal exports of
cannot even handle the 140 million tons currently
102 million tons and Australian exports of 51 million
being produced in the area. Beijing is addressing the
tons.
problem by electrifying and double tracking these
lines, by placing major new thermal power plants near
mine mouths, and by transmitting electricity through
long-distance powerlines.
The Chinese also have expressed considerable interest
in US coal slurry pipeline technology and have asked
Bechtel to do a feasibility study fora 700-km, 30-
million-ton annual capacity coal pipeline from the
Junggar mine to Qinhuangdao port. This line was
included in the Sixth Five-Year Plan, and funds
presumably have been designated for its construction.
Two other slurry pipelines-one from Changzhi in
southwest Shanxi Province to Jinan in Shandong
Province and the other from western Henan Province
to Wuhan on the Changjiang-have been suggested.
Slurry pipeline technology is not new, but no large
commercial pipelines have yet been built elsewhere in
the world, although a number are planned in the
United States.
Exports-Needed To Repay Foreign Investment
Although China ranks third in the world in produc-
tion and reserves of coal, it remains only a minor
exporter, having shipped about 7 million tons in 1981
valued at $370 million. Net exports amounted to only
5 million tons because of anthracite imports from
North Korea.
Construction of rail and port facilities are the main
bottlenecks to export, but short-term export market
considerations and the probable long-term domestic
supply shortage will impede exports. Pressures from
both sides caused China and Japan to reduce their
target of sending 10 million tons of Chinese coal to
Japan by 1985. Even the more modest goal of 7 to 8
million tons, however, is still double the. 1982 ship-
ments. Japan is concerned with the dependability and
quality of Chinese coal, and, ironically, many Japa-
nese industrial consumers complain that they will be
unable to handle the larger ships that will be loaded at
the new Japanese-financed port facilities in Qin-
huangdao.
In the long run, however, China probably will have
little trouble developing markets for its coal. A 1982
Brookings Institution study forecasts Japan-the
world's largest coal importer-to increase its coal
purchases from 73 million tons in 1980 to 123 million
tons by 1990. At best, China will supply only about 20
percent of that increase. Moreover, Hong Kong,
Taiwan, South Korea, the Philippines, and Thailand
all plan to increase coal imports, and China is a
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nearby supplier. Hong Kong's two electric power
companies expect to import 3.5 million tons per year
by 1985, for example, and 10-12 million tons by 1990;
moreover, South Korea has been illicitly importing up
to 1 million tons a year from China. If Chinese
restrictions were removed, South Korea could become
a major market for Chinese coal. China is also
making some inroads into Indian and Bangladesh
markets. China's own demand for coal will be increas-
' ing rapidly as well, however, and we judge that China
will be unable to compete strongly against Australian
and US companies, except perhaps in the East Asian
region.
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