Unprecedented coal demand from China last year helped save Australia’s coal industry from making further production cuts as demand from traditional customers slumped during the onset of the global financial crisis.

While Shenhua increased its saleable coal production by 13.2% to a whopping 210.3Mt last year, the leading producer does not see any change to the country’s imported coal requirements.

Driving the soaring demand for metallurgical coal was a government crackdown on the small mines sector in Shanxi province.

In its recent annual report, Shenhua said production in the province fell 6.2% to 615Mt in 2009 with about 1000 small mines closed during the year.

“In 2010, the central government will broaden its experience in Shanxi province to other provinces of the closure and consolidation of small coal mines, hence capping the growth in coal production,” Shenhua said.

“The consolidation and reopening of production of small coal mines in Shanxi province will be a gradual process and explosive growth of production is unlikely to occur.”

But Shenhua expects better performance from China’s railway transportation of coal this year, and higher coal prices to reduce coal imports.

“Along with the recovery in demand of major coal importing countries and regions in the Asia Pacific area, coal spot price and sea freight of the region are expected to rebound,” the company said.

“The surge in coal price and freight will weaken the relative price advantage of imported coal over the self-produced coal of China.

“In 2010, the national coal import volume is estimated to be reduced to a certain extent but China will remain as a net importer.”

While the price differential between domestic and imported coal might play a greater role this year, Shenhua anticipates China’s demand for coal will “grow continuously”

As part of its operational changes in 2009, Shenhua chairman Zhang Xiwu said the company had increased the number of working faces in thin coal seams to enhance the recovery rate of resources.

Shenhua also consolidated its Shendong mines and Wanli mines under new subsidiary Shendong Coal Group to reap better synergies.

Zhang expects Shenhua to face challenges this year in sustaining the capacity from mines which are either newly constructed, have undergone reform, expansion, or technological upgrades and resources consolidation.

He said the steep rise in the net import volume of coal into the country was another challenge, while government regulations will create other issues.

“The Peoples Republic of China government’s implementation of the resource tax policy and the reform of the levy scheme on environmental protection will drive the company’s costs higher,” Zhang said.

Shenhua said national raw coal production grew by 8.8% last year to 3.05 billion tonnes.

Project development

The Watermark project is Shenhua’s first major international project and is ranked as one of the most important to the company.

In its annual report Shenhua said the estimated investment was “unknown”, but provided figures for its other projects.

Watermark racked up 0.28 billion yuan ($A44.86 million) in expenses last year while the planned investment this year is 0.83 billion yuan ($132.97 million) for the 10Mtpa thermal coal project.

An extensive drilling program remains underway and the company is continuing efforts to purchase the land within the 195 square kilometre exploration licence.

The decision to purchase the land appears to be a wise move in light of the recent court judgement against BHP Billiton’s Caroona coal project, which has caught the industry by surprise and further complicates land access for drilling in the state.

Shenhua is also working on its $224 million Shendong Daliuta underground coal mining project in Shanxi province which is expected to produce 10Mtpa with construction to finish in 2011.

Earnings

Shenhua, which also boasts railway, port and power generation segments, made a net profit attributable to shareholders of 31.71 billion yuan ($5.08 billion) in 2009, up 19% year-on-year.

The company ended 2009 with a cash position of 65.94 billion yuan ($10.56 billion).

Shenhua also reported a total JORC-compliant marketable coal reserve of 6.93 billion tonnes.