By Dan Oancea

Large increases in coal stockpiles were being recorded at major Chinese ports during the month of September. Qinhuangdao and Guangzhou ports have coal stockpiles in excess of 2-3 million each.

The Chinese thermal coal stocks increased from equivalent to 10 days of consumption in July to 15 day stockpiles in early September.

Partially to blame for the pileup was the shutdown of factories during the Olympics. Demand was also down because of plentiful rainfalls that filled up dams and generated access to hydropower viewed as an alternative solution/response to higher coal prices experienced at the beginning of summer. The cool summer also had a bearing in lowering the need for electricity.

A certain economic slowdown is also recognized as a factor in reducing the demand for coal.

High coal inventories in major distribution centers - ports - and Eastern China in particular are also a result of the Chinese centralized economy, whereby the central government establishes quotas for each and every province/region. The overstressed and sometimes antiquated railway system is still unable to meet the demand for coal in the Interior, where coal supply shortages are there to stay for the months to come.

In a year over year analysis for the first eight months of 2008 Chinese coal imports declined an important 18%. For the same period Chinese coal exports were flat even though the export price almost doubled.

Their National Bureau of Statistics reported that China produced almost 11 percent more electricity over the first eight months of the year than during the last year’s corresponding period. Almost 70% of China’s energy is being coal generated.

In 2007, China produced 2.52 billion tons of coal and consumed 2.53 billion tons (China National Coal Association). It was forecasted that 2008 coal production would be 10% higher. By looking at the figures one could easily see that China is trying to be energy self-sufficient and their production could easily match consumption if it weren't for planning, transportation and technical problems that still beleagured their mining industry.

Recognizing the shock waves generated by coal price hikes throughout the Chinese economy their government is also studying implementing a strategic coal reserve, most likely an in-situ resource that could be used to cool down high coal prices.

At the same time benchmark coal prices at the Australian Newcastle Port fell to their six month low on worries that the Chinese economy is gearing down. Also, the Baltic Dry Index - a measure of shipping costs - dropped another 10 percent following the price standoff between Chinese steelmakers and the Brazilian iron ore producer Vale do Rio Doce.