Sitting down for a rare interview with the foreign press, Chen Biting, the chairman of the Shenhua group, complains that “not many people understand China and its development these days”.
It is a common refrain from Chinese officials and state business executives about the outside world, but the evidence in Shenhua’s case is that the opposite may be true: many people understand the company and its pivotal position in China’s energy industry all too well.
As China’s largest coal enterprise in a country which is far and away the largest coal producer and consumer in the world, Shenhua is courted by its peer companies around the globe.
Chinese demand for coal, and a projected growth into the future, help sustain not just the share price of Shenhua, but also the prospects of global resource companies, such as Peabody, BHP Billiton, Rio Tinto and Xstrata.
Shenhua is also pushing to be an important operator in the development of coal resources in Mongolia, a country that has the attention of the world’s majors because of its huge resources reserves and proximity to China.
Offshore, Shenhua is looking at investments in Indonesia and Australia.
Both countries are potentially cheaper bases than the north-west Chinese coal belt from which to supply the industrial south of the country.
“If we transport from the west to the east and then to the south, the distance will be a little bit longer than that from Indonesia to Guangdong, and the profit would not be so good,” says Mr Chen.
Shenhua’s energy company itself is now listed at home and overseas, with both initial public offerings winning substantial support from the market.
The company’s mid-2005 $3.3bn IPO in Hong Kong, which attracted the backing of a number of the city’s biggest tycoons, was surpassed by its local listing last month.
In an offering that was hot even by the frothy standards of the local bourse, Shenhua raised $8.9bn in what was the largest ever local IPO, with the shares more than 30 times oversubscribed.
Formed only 12 years ago as part of an attempt to consolidate China’s sprawling coal industry, Shenhua’s prospects, and problems, mirror those of the industry as a whole.
A series of government policy changes in recent years, the imposition of taxes on land use and the environment, and the introduction of a bidding system to secure resources to replace potentially corrupt under-the-table deals, have made coal a more expensive business. But other policy changes have shifted the landscape in favour of large operators such as Shenhua, notably the crackdown on smaller, mainly private mines which were considered to have a bad safety record.
In coal, as in steel, oil and many other industries considered “strategic” by the government, Beijing has used numerous policy tools which favour large state-owned companies to equip them with the resources and expertise to compete globally.
“In the past, there was a huge network of small mines which produced no more than 20m tonnes a year. The employees had poor skills, the productivity was low, the technology was backward and the equipment was very poor,” says Mr Chen.
“In that sense, the benchmark for entering the industry is getting higher and higher now. People cannot just enter it freely.”
The industry remains fragmented, nonetheless. The coal industry has about 25,000 enterprises, with the top 10 producers accounting for less than 30 per cent of the market, according to CLSA, the brokerage, in Hong Kong. Such fragmentation is likely to mean more consolidation in the future.
Shenhua, in any case, has become much more than a coal company, investing in the logistics of its business, in railways, ports and ships.
The most controversial expanding area of business, and one that brings Shenhua up against many barriers, is the fast-growing coal-to-liquids and coal-to-chemicals sector.
Shenhua has been working with Shell and South Africa’s Sasol, both world leaders in the field, but its pioneering CTL project in Inner Mongolia is using its own technology, untested for mass production.
A Shenhua spokesman has said the company plans an output of 30m tonnes a year of all coal liquefied products by 2020, but its executives face formidable political and environmental obstacles to meet this goal.
Becoming a scale player in what is, in effect, the oil industry, makes Shenhua a rival for the large state majors, such as PetroChina. More importantly, CTL projects need lots of water, a resource that is scarce in China’s coal-rich regions.
Mr Chen says the first stage of the project in Erdos, Inner Mongolia, which is due to begin operations late next year, has sufficient water allocations, but indicates that any expansion would face tough regulatory scrutiny.
“For the new projects, the government says ‘if there is sufficient water supply, you can do it, but otherwise you have to stop it’,” he says. The local government in Erdos is believed to covet the same water for its own industrial projects.
At least one aspect of the project seems sound. Mr Chen says the investment is viable with an oil price of $30 a barrel, a figure that looks sustainable for some time to come.
Shenhua in any case, after two successful IPOs, and a few very profitable years, has little trouble in finding money to invest. Already, about one-third of capital investment is financed by retained earnings, Mr Chen says. “Chinese bankers are eager to give us credit,” he says. “We don’t lack money at Shenhua.”
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By Richard McGregor
Published: October 9 2007 08:48 | Last updated: October 9 2007 08:48
