Bearish market sentiment towards the mainland coal industry, reflected in China Shenhua Energy's share price, has been sparked by warnings that the era of high coal prices may soon end.

 

However, some fund managers and analysts say high coal prices are likely to be sustained and may even increase further because of strong demand and delivery problems due to transport bottlenecks.

 

The debate over coal price trends intensified last month as Shenhua, China's largest coal miner, prepared to float its shares in Hong Kong.

 

Concerns that prices may have peaked - they have been rising since 2003 - forced Shenhua to price its shares at HK$7.50, near the lower end of the offer range of HK$7.25 to HK$9.25.

 

China's economy grew 9.1 percent in 2003, the highest since 1996, followed by 9.5 percent growth last year.

 

Partners Capital Asset Management chief investment officer Clive Zhang said that “as coal prices have been climbing a lot for the past three years, the chance for them to turn downwards is big.''

 

Apex Capital Management managing director Au Yeung Tat-hin warned that “if China's economy slows, prices of oil, steel, coal and other commodities will fall.''

 

Coal prices rose 40 percent last year, partly driven by transportation bottlenecks due to badly managed railways. Some analysts predicted a drop in prices, especially if transport bottlenecks are ironed out.

 

Investment bank Goldman Sachs believes coal prices will ease. “We believe prices are close to peaking now and could moderate later in 2005'' because significant new capacity at key ports and railway lines which transport coal to coastal provinces exceeded the bank's anticipated coal demand growth.

 

Coal transportation has significantly increased during the past 25 years. China carried 420 million tonnes of coal via rail in 1980 and volumes more than doubled to 1.17 billion tonnes in 2004.

 

To solve the transport problem, the Ministry of Railway plans to build at least 2,000 kilometers of rail every year over the next 15 years. By 2020, 100,000km of new railways will be in operation.

 

“The bottleneck problem cannot be solved in a short run. It will take a long time,'' said APAC Capital assistant portfolio manager Tim Tse.

 

“Short supply coupled with strong demand for coal will continue to drive prices up, although the upside may not be as high as last year,'' said Richard Wong, equity director at HSBC Investments.

 

Figures show China's consumption of coal in the first five months rose a year-on-year 8.5 percent to 728 million tonnes, which was lower than the production growth of 7.6 percent in the same period.

 

Atlantis Investment Management managing director Liu Yang said that “even if coal prices peak, they will not collapse because demand is still strong.''

 

One European-based bank investment adviser said pessimism over coal prices was triggered by fund managers' desire to suppress Shenhua's stock price.