47131 Economically, socially and environmentally sustainable coal mining sector in China The World Bank China Coal Information Institute Energy Sector Management Assistance Program December, 2008 i Contents CHAPTER 1 INTRODUCTION...........................................................................................................1 CHAPTER 2 OPTIMIZING EXTRACTION .....................................................................................8 2.1 QUANTIFYING COAL RESOURCES AND RECOVERABLE RESERVES....................................................8 2.2 RESOURCE EXPLOITATION POLICY................................................................................................11 2.3 COAL RESOURCE POLICY REFORM NEEDS......................................................................................17 2.4 RECOMMENDED POLICIES TO IMPROVE EFFICIENCY OF RESOURCE EXPLOITATION........................17 CHAPTER 3 COAL SUPPLY INFRASTRUCTURE.......................................................................20 3.1 CURRENT STATUS .........................................................................................................................21 3.2 POLICY REFORM NEEDS TO ENHANCE PERFORMANCE OF THE COAL SUPPLY CHAIN.......................32 3.3 RECOMMENDED POLICIES .............................................................................................................33 CHAPTER 4 RESTRUCTURING AND REFORM .........................................................................35 4.1 CURRENT STATUS .........................................................................................................................35 4.2 SECTOR STRUCTURAL REFORM NEEDS ..........................................................................................52 4.3 RECOMMENDED POLICY REFORMS................................................................................................52 CHAPTER 5 SAFETY, HEALTH AND COMMUNITY IMPACT................................................54 5.1 SAFETY OF MINEWORKERS............................................................................................................54 5.2 HEALTH OF MINEWORKERS...........................................................................................................79 5.3 LABOR AND SOCIAL SECURITY......................................................................................................81 5.4 REFORM NEEDS.............................................................................................................................85 5.5 RECOMMENDATIONS.....................................................................................................................86 CHAPTER 6 ENVIRONMENTAL IMPACT ...................................................................................90 6.1 CURRENT STATUS .........................................................................................................................90 6.2 REFORM NEEDS...........................................................................................................................100 6.3 POLICY RECOMMENDATIONS ......................................................................................................101 CHAPTER 7 REAL COSTS AND STABILIZED PRICES...........................................................103 7.1 TRUE COST OF PRODUCING COAL................................................................................................103 7.2 COAL PRICE ................................................................................................................................107 7.3 REFORM NEEDS...........................................................................................................................112 7.4 RECOMMENDATIONS...................................................................................................................113 CHAPTER 8 INSTITUTIONAL AND LEGAL FRAMEWORK AND POLICY .......................116 8.1 CURRENT STATUS .......................................................................................................................116 8.2 REFORM NEEDS...........................................................................................................................117 8.3 REFORM NEEDS...........................................................................................................................122 8.4 RECOMMENDATIONS...................................................................................................................122 CHAPTER 9 CONCLUSIONS .........................................................................................................125 APPENDIX 1 UNDERGROUND COAL GASIFICATION (UCG)..............................................129 ii APPENDIX 2 EXAMPLE OF SELLING MINING RIGHT BYAUCTION................................131 APPENDIX 3 SAFETY MANAGEMENT AND CULTURE.........................................................132 APPENDIX 4 ROLE OF MINEWORKER SAFETY INSPECTORS (AFTER FEICKERT 2007) ..............................................................................................................................................................135 APPENDIX 5 COMPARATIVE ENVIRONMENTAL PROTECTION CASE STUDY FROM AUSTRALIA ......................................................................................................................................137 APPENDIX 6 A RECOMMENDED MINE PLANNING APPROACH TO CONTROL SUBSIDENCE IMPACT ...................................................................................................................138 APPENDIX 7 COAL INDUSTRY ADMINISTRATION IN SHANXI PROVINCE...................140 REFERENCES...................................................................................................................................144 iii Preface Sustainable development is a comprehensive concept which involves extensive contents. The core of the concept focuses on coordinated development of human being, economy and the society. It emphasizes eternality of development. The development should on one hand satisfy the needs of contemporary people and on the other hand not jeopardize the benefits of the future generations. The ancient Chinese philosophers advocated that "man is an integral part of nature". They maintained that man should exist harmoniously with the nature, which included the simple thought of sustainable development. The sustainable development of coal mining industry is, under the guidance of scientific development concept, aiming at the goal of overall coordinated development of the employees, coal sector and economy and the society, using advanced technology and scientific administration as a means to improve gradually safety capacity of coal mines and occupational safety and health conditions, to optimize consistently the industrial and product structure, to improve continuously the quality of growth of coal economy, and to take the path of achieving more secured safety, high utilization rate of resources, less environmental pollution and good economic benefits, and the path of sustainable development of coal mining industry. Since the opening up and reform, the demand for coal has increased drastically with fast growth of economy and the society. Coal output rose from 618 Mt in 1978 to 2523 Mt in 2007. As a result of 30 years hard work of employees in coal industry, the coal sector has made profound changes in China. Under such background, it is of important significance and far-reaching influence to make a to-the-depth survey of current status of the coal sector, summarize the achievements obtained since the opening up and reform, analyze the problems that affect the sound development of the industry and explore the path for sustainable development of coal sector. In 2005, the State Council promulgated "Some Opinions on Promoting the Sound Development of the Coal Industry (Guo-Fa No. 18)". Since then, the coal mining industry entered a completely new stage: the steps of restructuring of coal mining sector were accelerated; large scale conglomerates were rapidly fostered and the production concentration was gradually improved; investment of coal enterprises increased to a great extent; new system for technical innovation that integrated the efforts of enterprises, universities and institutes was set up steadily, the production force was gradually improved and the work safety conditions were evidently improved; "Black coal and Green Mining" was enhanced, circular economic development of coal made some progress; results were obtained in energy conservation and reduced emission; building of harmonious mine areas and promotion of coordinated development of regional economy became a common knowledge and conscientious action of coal sector. In order to meet the requirements of the World Bank, the State Administration of Energy of NDRC organized the relevant departments and research institutes to set up a research project entitled "Economically, Socially and Environmentally Sustainable Coal Mining Sector in China", and made investigations from 2006 to 2008. The World Bank also iv invited international coal experts to join the research project to embody the leading awareness and international angle of view in the project. The project has made an overall summary of the current status of the coal mining sector and detailed analysis of the existing problems in China in aspects of administration system, policies, laws and regulations, work safety, environmental protection, etc., barriers and challenges. It has proposed policy measures and recommendations for addressing the above-mention problems and for optimization of coal mining, acceleration of trade reform, balance of resource environment and for promotion of sustainable development of coal sector. The project lasted for two years and more. Thanks to the concerted efforts of the project team and experts at home and abroad, it is successfully completed. It is a beneficial attempt to discuss the path for sustainable development of coal mining sector in China through international cooperation. The results are fruitful, which provide effective criteria for the Government to make policy decision. I would like to express my heart-felt thanks here to all the participants of the research project. I wish a sound, ordered and sustainable development of coal mining sector in China. Mr. Wu Yin Chief Engineer State Administration of Energy December 10 2008 v Foreword Sustainable coal mining will optimize the use of natural resources to meet today's coal supply needs at an acceptable cost to both society and the environment, but without jeopardizing the needs of future generations. A sustainable coal mining sector is one in which coal is extracted to acceptable economic, social and environmental standards by all coal mines. In a sustainable coal mining industry, mines meet the full costs arising from their activities and compliance is assured by effective regulation. Thus, a competitive environment is created within which enterprises will strive for increased economic efficiency, greater returns on investment, reduced wastage of resources, reduced environmental impact, and safer coal mining operations. A sustainable coal sector depends on both its production and utilization. Demand side initiatives are therefore also critical. These include improved energy efficiency, the application of clean coal technologies, and the mitigation of air pollutants and GHGs. Although the latter are worthy and significant topics, this report focuses on the reforms required by China's coal mining industry to evolve a sustainable coal supply industry. This is a gargantuan task in itself. The issues associated with coal utilization are addressed by several on-going and planned World Bank studies. A previous study (ESMAP 2004) introduced many of the problems that China's coal mining industry needed to address on the path towards sustainability. Since then, the Government of China has taken many initiatives and achieved a great deal of progress with coal industry reform. This study builds on the previous work and concentrates on recent developments and emphasizes the key issues that remain to be addressed. There are no simple solutions and bold action will be required by the Government of China if its coal mining industry is to achieve long-term sustainability. Fundamental necessities are a functioning market economy, effective regulatory processes and enforcement of coal law. This report is not intended to provide a detailed strategy for achieving coal sector sustainability. But it does provide recommendations, rationales, and actions that the Government may wish to consider, as well as suggestions for detailed studies to implement them. Mr. David Dollar Country Director China and Mongolia Department East Asia and Pacific Region The World Bank December 10 2008 vi Acknowledgements This report was derived from the ideas, experience, and knowledge of a diverse group of Chinese and international experts. The principal authors are Jianping Zhao, Energy and Mining Development Sector Unit, East Asian and Pacific Region of the World Bank and David Creedy (consultant). But many other people contributed to the report, addressing key topics and issues making the exact boundaries of individual contributions impossible to demarcate. State Energy Administration of NDRC provided overall guidance and great support to carrying out the studies and preparing the report. Sincere gratitude goes to the following officials of NDRC: Mr.Wu Yin, Wei Pengyuan and Xia Xing. A group of distinguished Chinese experts coordinated by the China Coal Information Institute prepared a comprehensive background report summarizing the status of the sector, key initiatives taken and progress made in recent years. Reserachers are: Presideng Huang Shengchu of CCII, Liu Wenge, Sun Xin, Si Posen, Lan Xiaomei, Dong Weiwu, Pan Hongying, Chen Weichao, Sun Chao, Wang Ning, Xu Liang from Energy & Safety Division in CCII. The background report served as the basis for preparation of the report. The team worked closely with the principal authors in producing the final report. The team also organized a dissemination workshop held in Beijing in June 2008. The report also drew heavily from the following contributions: a case study of environmental controls on coal mining operations in the Hunter Valley, NSW, Australia, prepared by David Laurence, University of New South Wales, Australia; case studies of environmental impact and subsidence in Shanxi Province, China, prepared by David Wilshaw, Technical Director, Wardell Armstrong LLP, UK; and a case study of sustainable coal mining, policies and practices, in Shanxi, prepared by Wang Hong Yi, Shanxi Academy of Social Science, China. The team gratefully acknowledges the review and valuable comments of the three peer reviewers: Peter Crowley, Vice President, CRA, Australia; Zhu Deren, Vice President, China Coal Association; and Michael Stanley, Senior Mining Engineer, Oil, Gas, Mining and Chemical Department, the World Bank. Insightful comments and valuable suggestions were also provided by John Strongman, Adviser, Oil, Gas, Mining and Chemical Department, the World Bank, Graeme Hancock, Senior Mining Engineer, Oil, Gas, Mining and Chemicals Department, World Bank; and Masaki Takahashi, Senior Power Engineer, Energy and Water Department, the World Bank. The team is grateful to Ranjit Lamech, Sector Leader, Energy and Mining Sector Unit, East Asia and Pacific Region, who provided guidance and support during the work period. The team also appreciated the guidance and support provided by the management of the World Bank and the Energy Sector Management Assistance Program (ESMAP), including David Dollar, China Country Director, East Asia and Pacific Region; Magda Lovei, Sector Manager, Operations and Policy Unit, East Asia and Pacific Region; Junhui Wu, Sector Manager, Energy and Mining Sector Unit, East Asia and Pacific Region; Ede Ijjasz, Sector Manager, China Sustainable Unit, East Asia and Pacific Region; and Jamal Saghir, Director, Energy and Water Department. vii The work would not have been possible without financial support from ESMAP and the World Bank to carry out the analysis and research activities. Finally, acknowledges are due to Zhang Chunxiang, Senior Program Assistant, World Bank Office Beijing, for her support and assistance during the entire work period. viii Abbreviations and Acronyms ASX Australian Stock Exchange AUD Australian dollar (1AUD = US$0.83, April 2007) BAU Business as usual bbl Barrel, 1 bbl = 42 gal = 159 l = 0.137 t Bt Billion metric tones(Gigatonnes), 1 Bt = 1 Gt CBM Coalbed Methane CCII China Coal Information Institute CCN China Coal News CCT Clean Coal Technology CDM Clean Development Mechanism CER Certified Emission Reduction CMM Coal mine methane CO2 Carbon dioxide CSRC China Securities Regulatory Commission CTA Coal Trading Association (USA) CTL Coal To Liquid d Day DME Di methyl ether DMR Department of Mineral Resources (of the State of New South Wales in Australia) DPI Department of Primary Industries (Australia) dwt Dead weight tonnage EIA Environmental Impact Assessment EMP Environmental Management Plan EPA U.S. Environmental Protection Agency EPB Environmental Protection Bureau ESMAP The Energy Sector Management Assistance Program of the World Bank ETC Economic and Trade Commission (local level) EWG Energy Watch Group FDI Foreign direct investment FIFR Fatal injury frequency rate FOB Free on board GDP Gross domestic product GoC Government of China ha Hectare (1 ha = 10,000m2) IGCC Integrated gasification and combined cycle ILO International Labor Organization IPCC Intergovernmental Panel on Climate Change IPO Initial Public Offerings ix KWh Kilowatt hour KSOCM Key state-owned coal mines LSOCM Local state-owned coal mines LTI Lost time injuries m Meter MBI Market-based instrument MCA Minerals Council of Australia MOF Ministry of Finance MOH Ministry of Health MOLAR Ministry of Land and Resources MSHA Mine Safety and Health Administration (U.S.A) Mt Megatonnes (million metric tonnes) Mtpa Million tonnes per annum mu Area (1 mu = 667m2 NDRC National Development and Reform Commission NOx Oxides of nitrogen NSW New South Wales (a State in Australia) OS&H Occupational safety and health OTC Over-the-counter (commodity trading) PF Pulverized fuel (coal) ROM Run-of-mine coal (raw coal) SASAC States Assets Administrative Commission SACMS State Administration of Coal Mine Safety SAWS State Administration of Work Safety SCM Small coal mine SEPA State Environmental Protection Administration (now Ministry of Environmental Protection, MOEP) SETC State Economic and Trade Commission SOCM State-owned coal mine SOE State owned enterprise SOx Oxides of sulfer tce Tonnes coal equivalent tpa Metric tonnes per annum TVCM Township and village coal mine UCG Underground coal gasification UNDP United Nations Development Program U.K. United Kingdom U.S.A. United States of America VAT Value-Added Tax Yuan Unit of Chinese currency, US$1 = 7.7 Yuan, April 2007 x Executive Summary Executive Summary 1 An overview that the national economic growth and energy pattern is unsustainable and has China is the largest coal producer and focused the 11th Five Year Plan on the coal user in the world. Unlike other large adoption of stringent sustainable producers, most of China's coal comes development policies. from underground mines. It extracts six times more coal per day from Coal resources are not an immediate underground coal mines than the USA, limiting factor, although the ultimate the second largest coal mining country. magnitude of China's coal resources are As a result of China's continuing not accurately known and more detailed economic development it is now exploration, mapping and analysis are responsible for over 70 percent of the needed. Tentative projections indicate growth in world coal consumption. Its that economically extractable reserves coal mine production capacity has grown could be approaching exhaustion in 70- by over 1.5 Bt since the year 2000, 80 years or less depending on the scale achieving an output of 2.52 Bt in 2007. of imports. Due to its long-term dependence on coal, China needs to Coal demand in China could rise to implement policies to ensure that its coal more than 4.0 Bt by 2020. This is much resources are systematically explored higher than the 3.0 Bt predicted by and accurately documented and China's government planners which exploited in the most economically assumes certain rates of development of efficient way. This has led to the urgency the renewable sector as well as of a sustainable development strategy increased energy efficiency, both of for the industry. which may not be realized in practice. In addition, China's economic growth rate The State Council (2005) has identified could be much higher than planned. the problems that need to be solved to Thus, the rate of growth in demand for develop a sustainable coal industry. coal could be significantly Unregulated expansion of coal underestimated. production had resulted in the inefficient exploitation of resources, over capacity China's coal supply must therefore mining, insufficient concentration of expand annually by around 140 Mt, scale, and shortcuts in accelerated new which is 40 Mtpa more than was mine construction with minimal regard achieved from production expansion in for worker health and safety and key state-owned coal mines (KSOCM) environmental protection. A historical from 2001 to 2005. Due to internal coal legacy of social and environmental transportation constraints some of the problems has been created which increase in demand will be met by rising requires treatment and funding. imports, especially in the southern coastal regions of China. However, The State Council has ruled that international trade will only be able to provincial and local governments should supply a relatively small proportion of no longer interfere with the business China's overall coal needs. activities of coal mining enterprises and Approximately 2 percent was imported in instead, concentrate on introducing 2007. policies aimed at developing a fair and competitive market environment. A Higher than expected economic growth, cornerstone of the State Council's plan and use of more coal than planned is the restructuring and consolidation of during the period of the 10th Five Year the industry into large, economically Plan, led China to miss 8 out of 14 efficient enterprises. Small mines of less targets set for improving environmental than a minimum capacity which are standards. The Government recognized illegal, backward, inefficient and xi Executive Summary polluting, and which cannot be merged Price controls on coal have been largely into larger mines, are to be eliminated. removed and the industry is more The Government's view is that efficiency profitable than ever before in its history. of scale will facilitate rapid progress In 2007, the average profit margin of the towards a sustainable, modern coal large coal mine enterprises increased by industry with improved safety, mining 29% in comparison with that in 2006. efficiency, resource recovery, and Particularly, the average rate of return environmental protection and restoration on net assets for domestically listed coal with mines bearing the full costs of coal companies reached a healthy 28%. extraction. The energy security interests However, these profits include external of the State will continue to be protected costs of mining that have not yet been by macro-controls exerted by NDRC. internalized. The average salary of the coal industry workers is below those of other comparative industries and is not 2 Progress with coal high enough to attract skilled staff. industry reform Coal prices are now able to freely adjust to fluctuations in supply and demand but The Government has achieved a great power prices are still constrained by deal of progress with coal industry government controls and are unable to reform. A major campaign was undertaken as part of the 10th Five Year respond similarly. This means that coal market efficiencies will not be Plan (2001-2005) to rationalize the transmitted across the energy sectors. structure of the coal mining industry and The Government retains the right to accelerate modernization. Coal intervene in coal prices if it deems it production was designated as the priority. In the 11th Five Year Plan necessary, but has shown considerable restraint. increasing efficiency of resource exploitation replaced maximization of The efficiency and scale of mining coal production as the priority, marking operations have been raised through the Government's realignment of industry restructuring and modernization. objectives towards sustainable Despite these efforts, overall productivity development. is still relatively low at about 400t per man year, about one twentieth that of Institutional reform has seen State Australia. Nevertheless, the best Administration of Work Safety (SAWS) Chinese coal mines deliver world raised to Ministry status while State leading performances in coal production Administration of Coal Mine Safety rates. (SACMS) has been established as a separate entity with specific The KSOCM have been transformed responsibility for coal mine safety. into limited liability companies, However, there remains a gap at State increasing numbers of which have level in the coal industry management diversified ownership though share structure. Production responsibility is offerings on domestic and foreign stock shared mainly between NDRC and exchanges, although the State retains a SACMS but no single entity takes overall controlling interest. Local mines have responsibility for coal mining industry been incorporated into company management at the central level. At the structures both state-owned and private. provincial and lower levels of coal Foreign direct investment (FDI) in coal industry administration there remains mining remains low, with the excessive bureaucracy and overlap. Government showing little interest in Policy enacted at central and provincial relaxing ownership controls to attract level is not always implemented by overseas capital. county governments due to conflicts with local economic drivers. xii Executive Summary Consolidation and transition from companies are being established to inefficient small-scale mining to modern engender competition, increase mechanized large-scale mining has efficiency and broaden access to capital proved to be effective in creating safer which should lead to reduced coal and more efficient mines, maintaining transport bottlenecks. Government has county revenues, reducing wastage of also introduced policies to reduce coal resources, introducing responsible pressure on coal transport by rail from environmental management, and remote mining areas by encouraging promoting local economic and social greater coal use at the source in mine development. Despite these reforms, mouth power-plants and coal-chemical many small, unsafe, polluting and industry development. While these inefficient mines remain which local policies are successful in guiding municipal and county governments are industrial development, they are, of reluctant to close despite repeated State themselves, insufficient to offset the lack edicts. of rail transport capacity. In main mining areas, large mining Massive investment in safety enterprises are absorbing small mines improvements in large state-owned through merger and acquisition to mines, increased mechanization and concentrate scale and consolidate coal improved safety measures in locally resources. Thirteen coal areas have owned mines combined with the closure been identified for expansion and of many unsafe, unlicensed small mines exploration is being assisted with have all contributed to a reduction in government funding. Outside the main fatal accidents. The average fatality rate mining areas small mines are required to per Mt mined in KSOCM reduced from consolidate to increase scale and 1.1 in 2003 to 0.6 in 2006, an almost 50 integrate their resources, or close if they percent improvement in safety. Fatalities are below a minimum capacity. Thus, in all coal mines decreased by 20 coal resources are being consolidated percent in 2007, the second consecutive under fewer, larger companies to year such reductions have been facilitate more efficient exploitation. achieved. However, average fatality rates are still significantly higher than A new approach to the granting of those in the industrialized countries and mining rights has been demonstrated in further improvement is required. Shanxi Province which should lead to a more efficient exploitation of resources. Employment and social conditions for Until 2003, coal mining rights in China miners have also been improved over were largely granted by administrative the last few years. Social welfare allocation and coal mines had no provisions have been progressively incentive to optimize resource recovery. reformed with the introduction of pension In 2005, Shanxi Province introduced an funds and unemployment, health and experimental pre-paid royalty system injury insurance in all KSOCM. All based on reserves. Thus, a precedent mining enterprises are now required to has been firmly established for assigning make these provisions. Most of the a proper value to coal reserves which inherited social liabilities from the central will encourage more efficient mining and planning era have now been passed provide a revenue stream to the mineral from KSOCM to local authorities and owner ­ the Government. newly constructed mines are not beset by these problems. The Government is investing in railway, road and port expansions to raise the The Government's sustainable freight transport capacity of domestic development strategy for the coal mining and internationally traded coal, but there sector consists of a series of are still coal supply concerns. Rail environmental measures which include construction and train operating compensation and restoration schemes, xiii Executive Summary water resource protection and improved government intervention, yet properly governance of coal mining waste and regulated, will deliver China's finite coal subsidence issues. The measures are resources to users at minimum being implemented through improved economic, social and environmental planning, EIA procedures, supervision, cost. collection and governance of restoration funds, and the incorporation of Whilst espousing the need for environmental reparation expenditure development in accordance with market into mine operating costs. The strategy principles, the Government continues to does not explicitly mention greenhouse focus on strengthening its planning gas emission reductions. These are controls underlining a reluctance to seen as beneficial when achieved accede fully to a market mechanism. through methane utilization projects, but Rigid government controls weaken the are not viewed as a priority under effectiveness of many of the reforms and China's Kyoto Protocol obligations. cause inefficiencies in coal supply. Environmental awareness has been The route to a sustainable coal industry, raised but is only just starting to have a therefore, involves removing barriers positive impact on environmental which are impeding market protection activities. EIAs are required determination of resource allocation, by the Government prior to mine coal exploration, mining method, and construction and must be reviewed and beneficiation. The efficient functioning of approved before project construction the domestic coal market is, in commences. Until recently, an EIA has particular, inhibited by coal transport only been required for each single mine limitations with investment in construction project but in future a development of the rail sector broader environmental assessment will insufficient to keep pace with coal be needed prior to the development of a transport demand. International trade large multi-shaft mine complex to ensure restrictions, albeit now diminished, a holistic approach. shelter exposure of China's coal mines from external competition reducing The Government is testing coal industry pressure on them to increase efficiency sustainable development policies in and also preventing coal users from Shanxi Province and a sustainable accessing the most competitive development fund has been established supplies. to which all coal mines contribute. The proceeds are apportioned between Optimization of resource exploitation social and environmental projects. Various environmental-related charges Optimum exploitation of resources and have been levied on coal mines in the efficient mining is being prevented by past, but until recently there has been micro-regulation of mining activities too little accountability of the use of the through the imposition of detailed, funds. prescriptive standards such as specified resource recovery factors. These leave little scope for innovation and 3 Policy options to improve competition resulting in higher mining the market orientation and costs and lower economic efficiency than achieved by international mining hence sustainability of the companies. industry Coal mines would have sufficient A sustainable coal mining industry will incentive to optimize extraction of coal deliver a quality product to the customer resources in a free market, where a at an acceptable cost to society and the royalty is paid in advance based on environment. The market system, if reserves (as demonstrated in Shanxi), allowed to act without excessive without need to specify recovery rates xiv Executive Summary and minimum seam thicknesses to policy incentives for CTL, in the western extract. Resource recovery factors are regions and elsewhere, to ensure that not specified in other major coal mining coal use is determined by undistorted countries. To enforce them in China market demands to obtain the optimum could cause mine owners to subject economic benefit for China. mine workers to unacceptable safety risks and encourage mining of dirty, To extend the life of China's coal polluting coals. resources, the economic and financial The Bank therefore recommends that viability of alternative methods for resource recovery factors be abolished extracting energy from seams that are and that a pre-paid royalty scheme for too deep or difficult to mine coal based on the value of the resource conventionally should be investigated as is introduced across all coalfields in a source of energy for power generation. China. Advanced payment of a royalty In particular, additional policy and excludes under-capitalized coal mining financial incentives should be provided enterprises and provides an incentive to to support the demonstration and mines to increase efficiency to recover commercialization of underground coal as much of the coal as it is cost-effective gasification technology as this to do so. The market will optimize technology could, in the future, prove to recovery rates from a social perspective be competitive with alternative fuel provided it is facing undistorted market sources. prices and bearing the full costs of production (financial, health and safety Coal industry restructuring and environmental). Restructuring of the coal sector is well The pre-paid royalty element is relatively advanced and the necessary policies low compared with revenue based are in place to guide the establishment royalties incurred in other mining of large-scale production enterprises. countries . The merit of charging an 1 The remaining structural problem to be additional, modest royalty linked to the solved is the closure of small mines. A value of the product should therefore be sustainable coal mining sector cannot examined. This would ensure that the accommodate the unregulated coal coal owner (government) is mining activity which has been prevalent compensated for the true value of the at the small mine scale. The resource. Government has struggled to sustain its closure plans as local governments, China has extensive and incompletely mainly at county level, are finding it explored coal resources in its remote difficult to implement policy which western regions. In addition to satisfying conflicts with local economic drivers and local demands for thermal coal, current social needs. The problem is expansion of coalfield development is exacerbated by some local government mainly associated with coal-to-liquid officials who, despite government (CTL) projects. It is important that these regulations to the contrary, continue to coal resources are exploited optimally, retain financial interests in local mines. consistent with the long term strategic energy needs of China. Legal small coal mines should be guaranteed payment of the The Government should therefore compensation they are entitled to if undertake detailed economic, social and closed by administrative order for policy, environmental studies of coal transport consolidation or transformation reasons. and coal derived energy transmission The Government should provide social options. Meanwhile, there should be no protection for laid-off workers including itinerants. Funds, such as micro-credit schemes could be made available for 1 Royalties paid on underground mined coal are encouraging new businesses in areas typically 5-8% of revenue in Australia and USA respectively affected by extensive small mine xv Executive Summary closures to provide alternative income other productive inputs so as to earning opportunities and so reduce minimize costs and thus increase temptations to return to illegal mining. efficiency. Foreign manufacturers are often reluctant to introduce their most The closure policy on small mines based recent technologies into China's coal on minimum capacity is too inflexible in mining sector due to intellectual property failing to recognize the energy and rights (IPR) protection concerns. In economic needs of remote communities. addition, outdated underground Minimum capacity criteria for coal mines equipment and electrical safety approval should be abolished in remote mining procedures in China (Mei Anquan) delay areas where there are no large mines. entry of advanced foreign equipment Small mine construction and mining manufactured and tested to approvals should be based on the mine internationally approved levels of safety. adhering to specific safety and It is therefore recommended that IPR environmental performance criteria, the protection for foreign imported mining qualification of the mine manager and a equipment and technology is demonstration of local social and conspicuously enforced and punitive economic need. fines imposed on malefactors and that China's mining electrical safety In the USA, the Mine Safety and Health standards are made comparable with Administration (MSHA) has European systems. demonstrated that safety of small mine operations can be improved significantly The current approval procedures for coal if it is supported by a suitably robust mine engineering design and enforcement and advisory regime. Since construction ensure wide replication of the creation of its Small Mines Office in proven, but not universally applicable, 2003, small mining operations designs to prescribed standards. (employing five or less miners) However, this rigid approach stifles experienced a 66 percent decrease in innovation. State Council has asked that fatality incidences, bringing them into the long overdue revision of mine design line with the large mines, within five standards be expedited. China is also years. increasing expenditure on mining-related research and development (R&D) but Provincial authorities should therefore any new developments arising from be empowered to issue "small scale work at mining institutes and research mining licenses" which clearly spell out centers will have little impact on the minimum employment and safety improving the efficiency and requirements that small scale coal mines sustainability of an industry bound by must achieve, with operations being inflexible standards. It is recommended regulated and policed by provincial that restrictive, prescriptive policy (rather than local) authorities who have standards are replaced by performance the power to terminate licenses and shut standards as these will allow new operations if safety and employment developments to be accommodated, practices do not comply with the license mining costs reduced and production conditions. efficiency increased. Enhancing competition and The use of more and increasingly production efficiency sophisticated mechanized mining A competitive and sustainable coal equipment and technology is being mining sector should have access to the hampered by a growing skills shortage. most modern, advanced and energy Large mining groups, keen to attract and efficient technology. Participants in a retain graduates and skilled technicians, competitive coal market will continuously are offering attractive employment strive to develop and adopt new packages. Therefore, the most profitable technologies that save both energy and mines will attract the best qualified staff, xvi Executive Summary a just market reward for efficiency. More environmental performance and high quality education and training increased competition (and therefore resources should be established to efficiency). The Government should provide the increasing numbers of therefore consider removing investment specialists required by the coal industry, barriers to FDI by opening controlling otherwise the full potential for improving ownership of coal mining enterprises to production efficiency through the private sector and international mechanization and advanced participation. This would accelerate technology will not be realized. modernization and speed efficiency gains in the drive to maximize returns to Government policies issued by SAWS investors. and NDRC which encourage concentration of coal production on Establishing real costs and fewer longwalls and limit the number of stabilizing coal prices men in an underground shift are providing impetus to mechanization, In a sustainable coal mining sector all thereby reducing the number of miners mines should meet the full costs of underground at risk. The aim is to production and, in particular, mitigation increase mining efficiency and deter of social and environmental impact. hazardous manually intensive mining These costs should be visible in operations. However, in a competitive accounting statements. Currently, only market mines should be free to make subsidence cost is shown. KSOCM such decisions on commercial grounds. already make substantial contributions Increasing labor costs and enforcement towards mitigating their impact on of safety regulations will automatically health, safety, the environment, and the result in mines turning to increased community through various mining fees, mechanization to improve efficiency compensation payments and social, without need for specific policies. The health and accident insurance schemes. current policies have merit as an interim, In a sustainable industry, these same temporary measure but they should be fees and requirements must be applied removed once the restructuring of the to all coal mines to create "a level coal industry is complete. playing field". Financing industry expansion Between the mine and coal user, additional fees are sometimes incurred; The coal mining industry will require an some of which have no legal basis or estimated investment of more than regulatory function. In accordance with US$100 billion over the next 12 years State Council's direction, such charges with additional funds to raise the should be removed. The effect of these capacity of coal transport infrastructure. charges is to increase the price of coal Growth in the coal mining sector is for no added economic benefit, thus currently funded almost wholly from reducing the competitiveness of coal. domestic sources through enterprise funds, share offerings, banks and Greater exposure of China's coal mines government subsidy. In the two years to to competition in a market where the full December 2006 US$26 billion was costs of mining are met will lead to a invested in additional coal production. realistic pricing structure. A market To accelerate reforms towards a system will provide the balances through sustainable coal industry, access will be price variations and these will be required to the capital markets. influenced by domestic and international factors. Stability of coal prices depends Current government policy, which on coal supply and demand. Any prevents majority foreign ownership and government attempts at stabilizing the management of coal mines, is an price of coal will lead to supply-demand impediment to FDI and to the imbalance. Producers and buyers can establishment of improved safety and reduce exposure to volatility by futures xvii Executive Summary trading. Government should therefore industrialized countries, supported in refrain from intervening in coal pricing some cases by regional union safety and a coal futures trading market should inspectors, has resulted in significant be established in China. accident reductions, especially where workers elect their own representatives. Where there is a strong and natural The Government of China has already linkage between a coal mine and a commenced a similar approach with the power plant, good international practice decision in May 2005 to appoint 100,000 is for long term (5-20 years) supply worker safety supervisors or inspectors, contracts to be signed between the mine but the move lacks clarity and and the plant. These contracts should fix transparent policy support. The annual volumes and set an initial base Government should introduce a policy year price that provides a reasonable that requires worker safety inspectors to return on capital to the mine and include be appointed at all coal mines in China. provisions for annual price adjustments These worker safety inspectors should based on cost-related inflation factors. be selected by their colleagues, be For this recommendation to be effective suitably trained and authorized to carry power plants would need to be allowed out inspections on behalf of fellow to adjust power prices to reflect the initial workers and represent them to increase in coal prices that would result management without fear of from such coal supply and pricing persecution. contracts. Raising power prices would not only adequately reward the coal Government mine safety inspectors in suppliers and encourage more coal China have too little power and investment, but it would also encourage independence compared with their consumers to use energy more foreign counterparts in the industrialized efficiently which would help reduce the mining countries to be effective. rapid growth of energy demand in the Enforcement of safety standards at coal future which in turn would help reduce mines in China should be strengthened the likelihood of future coal shortages. with regular underground inspections of Coal mines and users should therefore working areas made by experienced and be encouraged to enter into long-term technically qualified provincial level contracts and a freer pricing policy be SACMS inspectors. These inspectors established for the power sector. should have the power to suspend, if judged necessary, coal production Improving mine safety without reference to higher authority until Progress still needs to be made before identified problems are rectified and to China's coal industry can match impose punitive fines for specified safety international coal mining safety contraventions. A major recruiting and standards. Average fatal accident rates training effort would be needed to in China's coal mines were still two provide the necessary number and orders of magnitude higher than those in quality of inspectors, together with funds Australia and the USA in 2006, but the to meet the costs. situation is improving. Further improvements in mine safety are Gas explosions are a major concern in constrained by a lack of worker China's coal mines. These can only involvement in accident prevention. occur where there is an explosive While miners in China have the right to mixture and an ignition source refuse to work where dangers are simultaneously present. The evident, they have insufficient Government has invested considerable empowerment, protection and training to effort and funds to introduce gas exercise this right effectively. drainage and to improve ventilation standards in coal mines to reduce gas The introduction of worker safety accumulation risks. However more inspectors in mines in some of the needs be done to remove potential xviii Executive Summary ignition sources. Training and companies and officials. knowledge transfer is needed to refine gas control management systems, to The present provincial government led reduce the risk of explosion and to administration of mine production safety improve the effectiveness of gas capture (separate from work safety) is systems, many of which are performing cumbersome. Safety in coal mine inadequately. Thus, more of the gas production in China is treated as an released by mining can be captured, and additional feature requiring detailed increased gas quantities can be made administrative supervision by provincial available for utilization. Consequently, and lower level departments. The mine methane emissions to the Government should transfer total atmosphere will be reduced. responsibility for safe production to mine designers and managers in line with Coal mining fatalities per Mt in different overseas practice and treat safety as an provinces have ranged from 0.04 to inherent part of mine design. The role of almost 40 in recent years. Some mines inspectors should be to check KSOCM, including gassy mines, have compliance with operational safety matched the zero fatality achievements criteria. of the safest mines of the international coal mining companies demonstrating Coal mine safety training programs have that best practice world standards are been implemented to ensure all achievable in China. The Government management and personnel are certified should therefore gradually move towards on paper. Despite this, safety practices a zero fatality tolerance target for all are still inadequate in many mines. mining enterprises. Traditional, non interactive, teaching methods also tend to be used which do Safety agencies in the industrialized not stimulate creative thinking. The countries with responsibility for coal content of the courses, training, and mines generally publish annual statistics examination and assessment methods showing safety performances, including should be regularly audited and non-fatal accidents, to provide a fuller developed to ensure continuing insight into the wide range of accidents, improvement in the safety of mining their severity and causes. Paying more operations. serious attention to non-fatal accidents will help to establish a safety culture that Healthier working conditions will result in fewer fatalities and fewer multiple fatality accidents. SACMS Health issues receive less attention than should follow this example. safety in coal mines, although substantially more workers are affected Mine management, mine staff and by chronic lung disease than are killed in students in teaching and training accidents. Some 300,000 coal miners at institutions would increase their KSOCM are suffering from various understanding of accident causes and stages of lung disease and there are thereby contribute to innovation in safer 12,000 new cases in KSOCM and about working practices if they were given free 60,000 new cases reported annually in access to detailed accident reports and State owned coal mines (SOCM) and data. Investigations of all major coal township and village coal mines mine accidents should therefore be (TVCM). The resulting direct and indirect completed and a factual report openly costs could amount to over US$6.5 published as soon as possible, or within billion per year, equivalent to an average one year of the incident, to ensure that of US$0.5/t in KSOCM and US$2.5/t in lessons are learned. This will allow the other mines. public and mine workers to recognize bad practice and thus bring social Dust conditions in China's coal mines pressure to bear on irresponsible and the high incidence of chronic dust- related diseases are unacceptable in a xix Executive Summary modern society. Coal mines must meet the costs of treating and compensating Social conditions afflicted miners in a sustainable coal mining industry. These costs will be felt A sustainable coal mining sector will indirectly through loss of skilled workers, exercise its full social responsibilities. At absenteeism, additional training costs coal mines of all type, all workers should for new workers, and directly through be offered fair and equitable contracts insurance premiums. The alternative of that include health and accident investing in prevention will be the lower insurance and retirement pensions. A cost option. certification scheme should be devised Failure to tackle the serious and growing which will allow temporary and itinerant problem of dust-related disease will lead workers to aggregate insurance and to a serious legacy of ill health, pension rights payable from a third party premature deaths and, at some time in institution such as a reputable insurance the future, claims for significant company. individual compensation payments. Laws and regulations exist which define Applying and enforcing fair employment legal liability and specify requirements regulations across all mines will not only for prevention, protection, supervision, ensure improved social conditions for inspection and treatment but these are workers in local and small mines but will not fully implemented or enforced. also bring labor costs into closer parity Although some attempt at compliance is with KSOCM and provide impetus for made in KSOCM most TVCM are largely increased mechanization, fewer workers ignorant of the effects of dust on workers at risk, safer working and greater mining health and of protection methods. The efficiency. At the same time policy action following measures should be taken to will be needed to create jobs for improve the situation: redundant mine workers with low skills. · Prepare national guidance on Coal quality policy options to reduce coal use impact on society modern dust prevention, protection and control measures Coal mines produce coal of a quality to and implement a national satisfy the requirements of users. The program of training for coal mine air quality benefits of using clean, officials and management. washed coal instead of dry-screened run-of-mine coal are well recognized, but · Enforce dust measurement and users will only buy more expensive coal protection regulations at all coal if required to comply with strictly mines with severe penalties for enforced environmental emission non-compliance exacted by regulations and controls. Supply-side provincial work safety bureau. coal quality policies have been attempted, but these have been largely · Implement health screening for unsuccessful, are difficult to enforce and all mineworkers, not just those in should be abandoned and replaced by KSOCM, by SACMS and the demand-side controls. Ministry of Health (MOH). The service should be charged to Controlling the environmental impact coal mines. of coal mining Subsidence caused by underground · Publish annual mineworker mining has damaged surface water health data to enable society, courses and underground aquifers, led government and coal mine to flooding of arable land, destabilized management to monitor the slopes, disrupted surface transport effectiveness of dust protection, infrastructure and caused small village control measures and communities to be moved. The impact is enforcement of the regulations. xx Executive Summary the most severe where thick seams are water courses, aquifers, built extracted at shallow depth. development and infrastructure can be assessed and the costs of mitigation and A study in Shanxi Province on reparation estimated. This process, environmental mitigation costs practiced for many years in the UK, suggested an average deficit between allows mine management to select the environmental damage and lowest cost mining options that conform environmental reparation and to prevailing environmental standards. compensation charges of US$5.4/t of coal mined (Shanxi Institute of Energy Recently introduced provisions in Shanxi Economy, 2007). However, the results Province for financing environmental seem to be based on worst case restoration from sustainable assumptions and the actual figure could development fees paid to government be as low as US$1.2/t. Nevertheless, it are a positive development, but is clear that all coal mining enterprises concerns remain on how projects will be are not yet bearing the full designed and managed effectively by environmental costs of mining. More local governments. research should be sponsored by government to develop a rationale for To prevent future compounding of estimating true environmental costs. mining restoration problems China should align with good international Environmental fees charged to coal practice by requiring that initial mine mines tend to be standardized across closure plans be prepared as part of the provinces and regions rather than mining license application (feasibility adjusted to site specific impact. study) and that all operating mines be Application of standard fees which are required to provide the licensing less than remedial costs provides no authority with mine closure plans and incentive for mines to lessen any impact. periodic updates. The mine closure In any event, fee charging is generally plans should address environmental ineffective as mines tend to consider the reclamation and social mitigation, and payment of a fee as justification for also include post-closure monitoring abdicating any further responsibility for and, where needed, further reclamation. action. Charging mining companies for the full costs imposed on the A safeguard environmental policy for all environment would give them an mining projects requires that an EIA incentive to take due care of the must be prepared and accepted before environment. It is therefore construction approval can be granted. recommended that fixed provincial and The charges for EIA consulting were set regional environmental fees are by government in 2002 but since that replaced by requirements to meet time the work load and requirements of environmental performance standards, an EIA have increased. Higher fees and thus actual costs, relevant to local, should be allowed for environmental site specific conditions. Mines should impact studies, which are undertaken by only incur fees and costs relevant to third party specialists, to facilitate more their impact. This would encourage mine detailed site investigations and the operators to identify and establish safer standards of EIAs should be and less environmentally damaging commensurately improved. mining practices to reduce production costs. Failure to submit or comply with an EIA can lead to fines from US$6,500 ­ Operational mining decisions should be US$26,000. This is a fairly significant based on environmental sensitivity plans fine for a small mine operator but not for prepared for each proposed longwall a large mining enterprise and therefore panel. From these the impact of coal the fine should be determined in extraction on land stability, land quality, proportion to the scale of the project. xxi Executive Summary weakened because there are no While suitable environmental protection incentives to encourage mines with poor laws and regulations exist, they are drainage systems to raise the quantity often not strictly observed. The Ministry and quality of gas drained and thus of Environmental Protection (MOEP, increase the potential of methane formerly SEPA) and its lower level utilization and emission reductions. It is departments should take a more active therefore recommended that MOEP and role in inspecting major coal mine SACMS collaborate in developing a exploration and construction activities policy to encourage improvements in and also surface impact during operation gas drainage practices which will lead to where concerns have been raised in the safer mining conditions, more methane EIA or complaints have been made by utilization and reduced emissions of affected individuals or organizations. drained mine gas. Local government should receive a Of the methane gas released from proportion of any environmental fines to underground coal mines, about 70 encourage support of EPB activities and percent is emitted at low concentration to finance local awareness campaigns in the ventilation air and this is the next on the benefits of environmental emission abatement challenge which protection. China must address to offset the climate change implications of a still rapidly The economic impact of climate change expanding coal mining sector. The attributable to mining has not been Government should develop and factored into China's coal mining costs introduce a ventilation air methane as this is not yet general practice in any (VAM) emissions reduction policy for its coal mining country. However, planning coal mines. authorities in Australia are applying similar calculations when reviewing new Strengthening the institutional, legal mine proposals and the Government of and regulatory framework China should monitor such developments. A sustainable industry must be responsive in its adherence to law and Government policy and financial regulations, especially those relating to assistance has enabled the coal mining safety and the environment, and sector to widely implement methane therefore it is important to establish a drainage technology and raise the gas clear legal and regulatory framework. capture potential of gassy coal mines. China's safety and environmental laws Coal mine methane utilization is now and regulations are reasonably well- being widely implemented, helped by developed, but enforcement is still weak. Clean Development Mechanism (CDM) Without strong enforcement, detailed financing. Thus, growth in the release of regulations are of limited value. greenhouse gas emissions attributable to the coal mining industry is being A well functioning coal sector requires reduced, although more could be laws and regulations that clearly specify achieved (ESMAP 2006). MOEP has (i) which institution has the authority to issued a standard that requires mines to issue exploration and mining licenses; destroy surplus drained methane that and (ii) which institutions are responsible cannot be used provided its for the oversight of the industry in terms concentration is 30 percent or higher2. of complying with conditions of The latter marks an important change in exploration and mining licenses, health, government thinking from an energy led safety, and social and environmental initiative to a climate change priority. rules and regulations. However, the emissions standard is The institutional structure of China's coal mining sector has been undergoing 2 reform for a number of years to reduce A national safety regulation for utilization of coal mine methane overlap between departmental functions xxii Executive Summary and conflicting regulations, but problems focus on establishing strategic still remain. A cohesive and efficient coal policy and monitoring and also sector administrative organization auditing provincial land and should be established. The legal regime resources departments to which defines the instructional structure ensure effective implementation. should clearly set out the roles and It should desist from attempting responsibilities of national and sub- to exercise control over national government agencies to ensure construction of coal mining that there are no overlaps of authority capacity by halting coal and responsibility. Inspection and exploration. Exploration should enforcement is best provided by officials be allowed to proceed as far in from provincial and regional offices, advance of demand as practical under national oversight, who are and economic. The timing of disengaged from local interests and exploration should be a matter influences. for the holder of the mining rights to determine on commercial Government reforms announced in grounds. Government March 2008 included raising SEPA to intervention is unnecessary if ministerial status and the establishment markets are functioning of a State Energy Administration to efficiently. undertake strategic planning and policy making. What, if any, extra powers the · SACMS is required to undertake Ministry of Environment will possess that coal industry production allow it to raise its effectiveness are management functions in unclear. It is also to be seen how the re- addition to its safety role. These organization has contributed to include residual functions from improving coal industry management the former Ministry of Coal coordination at Central Government Industry, together with new tasks level, but at least a body has been recently handed from the NDRC. identified whose responsibilities should Government mine safety include strategic coal sector planning. agencies in other countries are wholly independent of coal Despite recent institutional reforms, the mining interests. It is roles of key Central Government recommended that SACMS ministries and administrations in coal relinquishes its production- industry management still need to be related tasks and concentrates clarified to prevent further inappropriate its resources wholly on mine intervention with short-term policies that safety administration and contradict long-term needs, and to enforcement. The displaced ensure clear focus on their primary duties should be passed to a objectives: centralized coal industry management department which · The role of NDRC should be to should be accommodated in an provide coal mining sector Energy Ministry if such an oversight on behalf of the institution is formed. Government. This duty should pass to an Energy Ministry, · The Ministry of Environment and should one be formed. NDRC its lower levels are responsible should not intervene in coal for the administration of pricing as this distorts the market environmental protection. The and hinders supply-demand role of the Ministry of balance. Environment is, and should be limited to, ascertaining that coal · The Ministry of Land and mines manage and limit Resources (MOLAR) should environmental impact in xxiii Executive Summary accordance with China's laws. energy security safeguards as a buffer Particularly, MOE should against unexpected international events strengthen its monitoring and and will encourage the development of enforcement capacity to ensure alternative energy sources and imports that coal mines fully comply with as indigenous coal reserves become the approved environmental depleted. The Government's primary impact management plan during strategy should therefore be to foster the construction and operation development of efficient coal markets. phases. The large, consolidated mining group The coal sector administration is in companies now have the corporate, urgent need of rationalization at financial and management resources to provincial and lower levels where there guide investment and optimize revenue. are too many agencies, sometimes as It is, therefore, an opportune time to many as three, with overlapping coal relax government planning controls and industry management and safety take full advantage of market forces, responsibilities. Coal mining functions in placing more reliance on market-based provincial and local government instruments for regulation of coal Economic and Trade Commission (ETC) industry activities. departments should be transferred to the existing Coal Industry Bureau or The present legal and regulatory equivalent department. Mine safety framework is detailed, but rationalization enforcement and coal industry is needed. In particular, overly administrative functions should be prescriptive policy regulations and clearly separated at all levels. These standards are creating inefficiencies reforms would lead to greater within the coal industry by suppressing administrative efficiency and reduce the innovation and advancement. These temptation by frustrated coal mining government controls are preventing enterprises to act without formal market mechanisms from acting as cost approval. reduction, and hence efficiency, drivers. Prescriptive regulations should be All of the above recommendations made reviewed and where practical, abolished, in this report could feasibly be and replaced with performance completed within three years or less, as standards. Thus, provincial and lower the major reform steps have already level government coal department been taken by the Government. supervision and enforcement duties will be reduced, allowing the regulatory authorities more time and resources to concentrate on fewer and more critical key regulatory issues. 4 Conclusions Efficient, competitive free markets for coal with appropriate regulations to address health, safety and environmental problems will supply the coal necessary to meet China's future energy commitments. Government attempts at controlling supply and demand in the past have been ineffective and long-term planning should be aimed at allowing markets to function efficiently. This will provide xxiv Executive Summary Summary of recommendations Policy aim Current status Recommendation Optimizing · Application of resource recovery · Abolish prescriptive coal resource rate and minimum seam thickness resource recovery criteria recovery criteria · Apply pre-paid royalty · Resource life dependent on system based on coal reserves economic depth limit of throughout China to encourage conventional mining optimum extraction · Consider additional revenue-based royalty to reflect the coal value · Research feasibility of deep underground gasification Industry · Increasing scale of mining · Remove SCM capacity minimum restructuring enterprises for remote areas with specific · Closing small scale, inefficient, energy and social needs hazardous and polluting small · Guaranteed financial and social mines provisions when legal SCMs closed Enhancing · Trade controls · Remove import and export tariffs competition · IPR leakage · Protect IPR. and production · Inflexible design standards · Replace inflexible design efficiency Protracted mining equipment standards with performance approval process standards · Harmonize mining equipment approval process with EU Financing · In general, new mines are · Allow foreign majority ownership expansion domestically financed and of coal mines to attract FDI and controlled technology transfer Ensuring a · Coal supply continues to be · Introduce long term (5-20 year) reliable supply contracted between producers and supply contracts that fix annual of coal to the power companies at annual volumes with annual price power sector meetings monitored by adjustments based on cost-related with stable and government although longer term inflation factors (long-term predictable contracts (e.g., 3 year) are starting agreements dependent on prices to emerge relaxation of electricity price controls) Establishing · Mines not paying full HSEC · All mines to meet full HSEC real costs and costs commitments stabilizing coal · Supply-demand imbalances · Refrain from government prices created by short-term policy intervention to allow market intervention mechanisms to act · Futures trading facility to reduce price volatility effects · Undertake economic studies of coal by wire versus coal by rail to determine best development options for coal in western China Improving · Mainly top-down approach · Introduce worker safety mine safety · Weak enforcement of representatives elected by peers regulations at all mines · Poor gas drainage performance · Government safety inspectors · Safety targets too low authorized to halt unsafe xxv Executive Summary Policy aim Current status Recommendation · Cumbersome administration at operations without referral provincial and lower levels · Gas control training and technology transfer · Publicize accident data · Zero fatality targets · Simplify safety administration by better defining responsibilities of designers and managers Healthier · Serious dust disease problem · Enhanced guidance, practice working and · Poor conditions in local mines and enforcement of dust control social · No social security net for measures conditions itinerant workers · Health screening for all · Disseminate occupational health data · Equitable contracts for all miners Environmental · Fixed rate environmental fees · Set environmental performance protection · Standard EIA consulting charge compliance criteria not matching increased workload · Mines pay fees and · Fines for non EIA compliance compensation linked to full costs low of site specific impact · Trial CMM emissions reduction · Raise EIA consulting fee standard issued by MOEP · Increase non compliance fines in proportion to project scale · Add VAM abatement to MOEP's emission reductions standard · Feasibility study to include conceptual mine closure plan · All operating mines to submit mine closure plans and update at prescribed intervals Strengthening · Contradictory short-term policy · Clarify specific roles of key institutional, interventions by MOLAR and ministries and administrations and legal and MOEP transfer coal industry management regulatory · SACMS also carrying production duties to a new central framework related duties government coal industry · No central coal industry department authority · Streamline administration at · Overlapping and inefficient provincial and lower levels. administration at provincial and Cleanly separate safety and lower levels production functions · Rigid prescriptive regulations · Introduce performance standards · Reduce illegal mining by allowing provincial authorities to issue "small scale mining licenses" which clearly define the minimum employment and safety requirements that must be met to be allowed to operate or else face closure xxvi Introduction Chapter 1 Introduction China's coal industry development more responsive to environmental strategy stewardship, as well as to refine the China's current strategy for the underpinning policies and regulations. development of its coal industry is based These gains should be joined by on policies developed and implemented in strengthened management of resources accordance with the State Council's and their comprehensive exploitation, detailed opinions (Some Opinions of the including development of downstream State Council on Promoting the Sound coal processing and chemical industries. Development of the Coal Industry, No. 18 Specific aims and objectives are listed in [2005] of the State Council, 7 June 2005). Table 1.1. The highest level of government authority has thus defined principles to be followed A principle is thereby introduced where and guidelines to be adopted in the State provides guidance without over developing a sustainable, coal industry intervention in the development of coal which meets the needs of the national enterprises. Thus, the importance of economy. The above document commercial independence as a summarizes the rapid progress which has prerequisite for an efficient business is already been achieved within the coal acknowledged. Nevertheless, traditional industry and highlights the key issues that planning controls are still to be exercised must be addressed as the growing on coal mining enterprises and the State economy continues to drive coal demand, will help mining enterprises to address thus increasing pressure on resources, historically inherited liabilities. The the environment, and safety. The State ultimate aim is to develop a fair and Council's proposals are fundamental and competitive market environment. The far-reaching. Once accomplished, China's legal basis for the macro-control of coal coal industry will be capable of achieving industry regulation and policy is sustainability. encapsulated in the Law of the People's Republic of China on the Coal Industry According to the State Council, the aims and the Mineral Resources Law of the of increasing efficiency of resource People's Republic of China, both are exploitation, improving safety, improving under revision. economic performance and reducing environmental damage should be The Government has made substantial achieved through the advance of progress in addressing most of the State technology. Safety must be the foremost Council's aims. However, there are a few consideration. The key objectives are to omissions and key areas where consolidate coal mines into large-scale significantly more needs to be done to conglomerates with 100 Mt production achieve the desired objective of a capacities which are safer and which are sustainable coal mining industry. Table 1.1 State Council's objectives - development of the coal industry (June 2005) Category Objectives Efficient Coal exploration efforts are to be enhanced and sufficient reserves resource established to safeguard national energy demand. exploration and The quality of coal explorations methods, standards and techniques exploitation are to be improved. Detailed coal resource data and management of exploration and mining right allocation will be centralized. 1 Introduction Category Objectives Taxation through production and sales revenue should be replaced by a fee (pre-paid royalty system) based on the value of coal reserves once the mechanism has been tested and proven. Revenue earned from the transfer of mining rights to coal enterprises is to be re-invested in coal exploration through rotating funds. Improving Use of advanced mining technologies for exploiting thin and difficult mining seams should be promoted. efficiency The revision and updating of coal mine design codes should be accelerated. Coal industry Coal mining industry restructuring should be accelerated and coal restructuring supply infrastructure strengthened. Accelerate the construction of 13 large-scale coal bases founded on KSOCM with high-quality resources and good development potential. The State will inject capital from its infrastructure budget to assist the development of large coal-bases and the State financial sector should improve and expand their financial services to the coal enterprises. Diversity of ownership though public share offerings is encouraged. Priority should be given to industrial down-stream coal use projects (e.g. thermal power plants) sited at coal mines to reduce pressure on coal transport. Large-scale coal conglomerates which are not territorially constrained should be fostered. These large enterprises should compete internationally and also develop overseas projects. Large scale coal enterprises should be encouraged to annex and reform small and medium-sized coal mines, and encourage small and medium-sized coal mines with reliable coal reserves to consolidate through asset restructuring. Streamline corporate management and strengthen quality and commitment of front line management in coal mining enterprises. Continued closure of backward, inefficient, polluting and hazardous small coal mines which are wasteful of coal resources. Improve co-investment mechanisms for coal mine safety improvements by enterprises, and local and central government. Technology transfer, collaborative ventures and R&D should be aimed at producing more key, modern mining equipment in China. Collaboration among coal enterprises, scientific research institutes and universities should be strengthened to promote technical innovation. Stimulate mining related education, improve vocational training, mine staff training and raise skills and qualification standards within the industry. Foster a service industry of agencies and consultancies to provide industrial statistics, technical services, safety appraisals, market information and professional advice to government and enterprises. 2 Introduction Category Objectives This should include technical services support for small and medium scale mines. Institutional Improve the legal system, rules and regulations, policies, and macro- strengthening control of the coal industry Local government at various levels in coal-producing areas should set up effective coal industry management departments and strengthen their administrative practices. Local DRC coal departments at various levels are responsible for coal mining development supervision and the land and resources departments for managing access to coal resources. A specific requirement of the latter is not to exceed its authority in granting rights to attract FDI, presumably a pointed reprimand for past actions. New, transformed and expanded mining projects must be approved by the department of safety production supervision at the appropriate level of authority. Approvals and mining licenses should not be granted to mining projects that are not designed to achieve the standard extraction performance. Mining operations should be examined annually and those which are underperforming should be required to rectify the situation within a fixed time or be penalized and ultimately have their mining license revoked. Tighten licensing of coal mining enterprises, eradicate unofficial sales and transport charges, and ensure tax and financial probity. Reinforce the safety production system comprising State supervision, local government inspection and acceptance of responsibility by the coal mining enterprise. Promote sustainable development of coal enterprises. Coal mining enterprises should make financial provisions for eventual decline and closure, improve accounting procedures, increase resource exploitation efficiency and improve environmental stewardship. Coal market Use economic measures together with administrative rules and reforms regulations to balance the interests of coal mines and the power sector. Encourage suppliers and retailers to interact freely, without government intervention, and to negotiate long-term contracts. Accelerate the building of a modern, central, internet-based coal trading system. Health, Improve the working, employment and living conditions of coal miners, safety, including enhanced mechanization, shorter working shifts, improved environment personal protection equipment, accident insurance, income increases and linked to the financial improvement of the enterprise and upgrading of community sub-standard housing. Improve gas prevention and control technology. 3 Introduction Category Objectives Environmental impact assessment, protection and restoration measures should be strengthened and observed rigorously by mining enterprises. Coal Promote industrialization of clean coal technology, including improved utilization coal beneficiation, coal liquefaction and gasification. Accelerate demonstration of underground coal gasification for recovering energy from unworkable coal seams. Promote integrated clean utilization of previously discarded coal mine resources, including coal waste, coal mine methane, mine water and waste rock. Integrated resource utilization should become a condition for project approval and favorable financial and tax policies should be devised to aid implementation. Some Opinions of the State Council on Promoting the Sound Development of the Coal Industry, No. 18 [2005] of the State Council, 7 June 2005 China's coal mining industry achievements Since 1996, social welfare provisions China's coal mining sector has been have been progressively reformed in the undergoing reform for the past two KSOCM with the introduction of pension decades during which time it has funds, and unemployment, health and modernized its large mines, expanded injury insurance. These provisions are coal production, significantly improved now required to be made by all mining mine safety and raised the social benefits enterprises. to miners. The output of raw coal has risen by 1.1 Bt in the past decade from In 1999, bankruptcy provisions were 1.4 Bt in 1996 to 2.5 Bt in 2007. In the last introduced which facilitated the closure of 5 years, China's coal production capacity exhausted, inefficient and high cost has also been increased by 1.1 Bt mines. This, together with the closure of including newly built mines, mines under many small, polluting, wasteful and construction, and expanded and dangerous small mines, and the transformed mines (CCN 1 June 2007). consolidation and transformation of legal small and medium mines into larger Coal mines have become safer places to industrial scale mines, has improved the work with an absolute reduction in structure of the coal mining sector. fatalities by over 40 percent since 1996 and the fatalities per Mt coal mined Price controls on coal have been largely reduced to a third of the 1996 figure by removed and the industry is more 2007. The fatality rate in coal mines profitable than ever before in its history. In throughout Shanxi province dipped below 2007, the average profit margin of the 1.0 for the first time in 2004 falling to 0.90 large coal mine enterprises increased by in 2005, while some large mining groups 29% in comparison with that in 2006. have achieved zero fatalities in recent Particularly, the average rate of return on years. The expenditure of 83 billion yuan net assets for domestically listed coal (US$11 billion) over the last five years, companies reached a healthy 28%. mainly on safety technology and improvements in KSOCM, has resulted in China's coal industry challenges a reduction in the average fatality rate per China's sustainable development Mt mined from 1.1 in 2003 to 0.6 in 2006, depends on its ability to modernize and an almost 50 percent improvement. expand its coal mining sector in a manner However, significant progress needs to be that is safe, as well as socially and made to match international safety environmentally sustainable. In 2005, standards. China was responsible for nearly 77 4 Introduction percent of the growth in world coal therefore be implemented, and without consumption as a result of its continued detriment to the environment, to ensure strong economic growth and high sustainability of the sector. Government dependence on coal as a source of policy of encouraging downstream coal energy. Coal will still provide around 60 use at mine sites is aimed at alleviating percent of China's energy in 2020 by strains on coal transport. which time coal demand could reach more than 4 Bt (Figure 1). If China is to The Government of China does not seem maintain stable growth it must therefore to have fully recognized the likely scale of double its 2005 coal supply by 2020 and the coal supply problem. Despite the the Government seems committed to surge in energy demand in the last 5 producing as much of this as possible years, planners are still projecting total from domestic sources. Failure to address energy demand of 3.0 billion tce or less by the impact will result in an unprecedented 2020, compared to 2.4 billion tce in 2006. scale of environmental damage and According to government forecasts, 58 greenhouse gas emissions that will percent of total electricity generation in contribute significantly to global climate 2020 will be based on coal, reduced from change. 74 percent in 2006. Furthermore, the NDRC is proposing to cap coal production Coal mines cannot increase coal supply at 2.6 Btpa from 2010. These forecasts when they are already producing at full or are based on an optimistic projection of over-capacity and transport systems are over 205 GW per annum of renewable fully utilized. A continuous program of capacity by 2020 (CCN 5 Feb 2007). mine and transport construction must 5 4.5 4 3.5 3 coal 2.5 awrtB 2 1.5 1 0.5 0 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 Year Figure 1.1 Total coal output in China and future projections(unit: 10 Bt raw coal) In addition, the coal industry will need to projected to account for 45 percent of total meet growing coal demand from coal demand. If, as is likely, energy households, and steel and other demand grows much faster than projected manufacturing sectors, which together are there will be a large shortfall between coal 5 Introduction demand and indigenous coal supply. This Coal resources have been wasted in the concern is compounded by the likelihood past by failure to control the activities of that the renewable sector will not develop large numbers of inefficient small mines as fast as projected. and coal exploration has not kept up with Renewable energy at present provides 7 exploitation. Coal mining resources, percent of China's total energy supply and efficiency, environmental and safety the official target is 16 percent by 2020. issues are being addressed now by the Planned increases in energy efficiency Government and reinforcement of these may not be realized as the targets appear efforts will ensure that China's too ambitious. In 2006 and 2007, China development will not be compromised. reduced its energy consumption per unit of GDP by 1.33 percent and 3.27 percent Government has been reluctant to allow respectively, well below the 4 percent market controls to balance supply and target, and is very difficult to improve on demand and instead has intervened. this, while the heavy, energy intensive Large imbalances between supply and industries maintain high growth rate. demand have thus arisen, necessitating major intervention to prevent economic An increase in the price of coal-fired downturns and the Government has electricity would drive improved energy demonstrated an ability to induce rapid efficiency and cause electricity generated increases in coal supply in response to from alternative fuels and renewable coal shortages. However, the sources to appear more competitive. consequential suspension of However, it is uncertain how far environmental, social and safety government is prepared to go in freeing considerations was both unacceptable electricity pricing. and damaging to the country. This is particularly well exemplified by the rapid Environmental protection is suffering as expansion of small coal mines that was China missed its target of reducing encouraged by government legislation emissions of pollutants by 2 percent and enacted in 1983 in response to a coal failed to achieve 8 out of 14 targets it had supply shortage. The output of the town set itself for improving environmental and village owned coal mines peaked at standards over the 10th Five Year Plan 638 Mt in 1996, representing 46 percent due to higher than expected growth in the of the national coal output in that year. economy and the subsequent use of more The supply problem was solved, but at a coal than planned. high cost to the environment from uncontrolled excavation, water pollution Sustainable growth will continue to be a and surface fires from spontaneous major challenge for China over the combustion. In 2008 the Government is coming decades. China's economic still actively combating the problems growth over the past 25 years has been created by this policy. impressive and continued economic growth is an imperative for the Sustainable development is a strong Government if it is to attain its objectives focus of government policy and a of urbanization, rising living standards, sustainable coal mining sector is crucial to reduction of wealth differentials and securing energy supply. The aim of a continued social stability. A cost of sustainable coal mining sector is to growth to date has been an ensure a smooth supply of coal to China's unprecedented pressure on the key industrial and power consumers. This environment, serious air and water can only be achieved in a market in which pollution and rising greenhouse gas all coal is produced to economically, emissions. Strong economic growth has socially and environmentally sustainable also contributed to water and land standards ensuring that equal conditions scarcity. apply to KSOCM, foreign invested joint ventures, domestically invested private mines and overseas mining companies 6 Introduction exporting coal to China. Fair competition will lead to increased efficiency, greater returns on investment, reduced wastage of resources and a safer coal mining sector. Sustainable use of coal depends on both the production and the use of coal. Demand side initiatives are therefore also important, including improved energy efficiency and the application of clean coal technologies. 7 Optimizing extraction Chapter 2 Optimizing extraction Proven coal reserves account for 94 on the exploitation of coal resources to percent of China's total proven fossil fuel its economic growth. A coal mining energy resources, with oil and natural industry which adopts policies that gas accounting for only 5.4 percent and recognize the finite nature of the 0.6 percent respectively. Therefore, resources and encourages economically China will continue to be heavily reliant efficient exploitation will be sustainable. 2.1 Quantifying coal resources and recoverable reserves A coal resource assessment, conducted · Reserves Deducting all kinds between 1992 and 1997, identified a of losses from basic reserves, total resource of 5,560 Bt of coal of the coal reserves that can be which roughly half occurs at depths of economically worked out less than 1000 m and the remainder · Resources The less economic from 1000 m to 2000 m. About 1,018 Bt underground coal reserves, or of the resource was proven by the their economic significance exploration, including 192 Bt contained were uncertain, were defined as in existing mines and those under coal resource construction. The concept of reserves · Proven resources are the sum of being coal that is economically viable to basic reserves and resources mine held little meaning during the which have been found by central planning period in China. The reconnaissance. new standards issued in June 1999 for the classification of mineral reserves The revised assessment identified sought to address this shortcoming. proven resources of 1,021 Bt consistent with the total established by exploration In 2003 MOLAR revised China's coal in the earlier survey, but this time with a resources and reserves classification detailed classification broken down system, bringing it more into line with regionally (Table 2.1). international convention. The following categories were introduced: China's western areas are isolated from · Basic reserves: The the main economic hubs where most underground coal reserves, coal is consumed due to a lack of which can be utilized under transport infrastructure. The current techno-economical Government therefore classifies these conditions, i.e. coal regions as "self supporting." 8 Optimizing extraction Table 2.1 Status of Coal Resources and Reserves in China (Bt) No. of Basic Proven Developmen minin Reserves reserv Resource resourc t Region Planning area g (mineabl es s es(1) + areas e) (1) (2) (2) Beijing, Tianjin Hebei 274 4.2 9.8 8.1 17.9 Liaoning, Jilin, Heilongjiang 641 6.8 15.9 15.5 31.4 Jiangsu, Anhui, Shandong, 781 17.4 37.0 41. 6 78.6 Eastern Henan Region Zhejiang, Fujian,Jiangxi, Hubei, Hunan, Guangdong. 1,618 2.4 4.7 .4.5 9.2 Guangxi, Hainan Sub-total 3,314 30. 9 67.4 69.7 137.1 Shanxi, Inner Mongolia, Shaanxi, 1,208 126.7 213.4 472.6 686.0 Ningxia Central Guizhou, Region Yunnan, Chongqing, 1,051 24.4 36.8 49.5 86.3 Sichuan Sub-total 2,259 151.1 250.1 522.1 772.2 Western Self- Tibet, Gansu, supporting Qinghai, 538 7.3 16.7 95.1 111.8 Region Xingjiang Grand totals 6,111 189 334 687 1,021 Source: All China Reserves and Resources Bulletin, MOLAR, 2003 Reserves and resources are dynamic extracted in the interim period. quantities. Mineable reserves are being Documentation gleaned from various depleted at increasing rates each year government departments and institutions as coal is extracted, with 2.5 Bt being often does not clearly differentiate removed in 2007. At the same time, new between resources and reserves, further resources are being found and the confusing analysis. status of existing resources upgraded by detailed geological exploration. Tracking Nevertheless, it is clear that exploration these changes is difficult as detailed and mapping of coal occurrences is coal reserve data is not publicly incomplete and continuing exploration is available and it is unclear whether yielding substantial new coal resources annual reviews take full account of coal (Table 2.2). Table 2.2 Coal resource estimates Year Proven resources (Bt) Bi-annual increase (Bt) Source 2003 1,021 - MOLAR (via CCII) 2005 1,035 14 MOLAR (via CCII) 2007 1,091 56 McCloskey 2008 9 Optimizing extraction Additions to resources and reserves rather than the full workable seam is over the last few years include: questionable. · 620 Mt of proven coal reserves in There is uncertainty attached to reserves the "Three Rivers" area of associated with existing mines due to Yunnan province. the possibility that reserves have been · In 2004, 10.4 Bt of coal resources overstated to comply with outdated mine were identified by Shanxi design rules to ensure Feasibility Study Coalfield Geological Exploration approval, and hence mine construction Team and 890 Mt added to coal approval. As much coal as possible is reserves. included in assessments for coal mine feasibility studies to ensure that the · Xian Geological Reconnaissance prescribed mine life criterion in China's Research Institute of Shaanxi mine design code can be met. For Provincial Geological & Mineral example, to obtain approval for a coal Reconnaissance Bureau found mine project, a mine with a production some 3.5 Bt of resources of low capacity of 0.45-0.90 Mtpa should have ash, steam coal in Jingbian a life of at least 50 years and achieve a County, southwest of Yulin city specified coal recovery (for example, 85 during investigation of a Jurassic percent for thin coal seams). A feasibility coal basin in the Yuheng mining study will show the required result, but area of North Shaanxi. The whether it will be actually followed in thickness of coal seams varies practice is uncertain. The mine design from 2 m to 2.2 m at depths codes have been under revision for a ranging from 400 m to 800 m. number of years and despite a request · The No.2 exploration team of the from State Council have still not been Geological and Mineral completed and released. Reconnaissance and Development Bureau of Henan The Government specifies a minimum Province has identified 55 km2 of thickness of coal seams to be included coal resources in eastern Jiaozuo in reserve estimates. In areas where coalfield with 390 Mt of coal at coal seams are scarce, thinner coals depths of less than 1500 m and a should be included. In contrast to the further 240 Mt at depths greater reserve and resource classification, the than 1500 m. There are 2 main thickness standards have no economic coal seams. No. 1 seam is 6m basis and are purely prescriptive. thick and No.2 coal seam is almost 3 m thick. The depth of For all of the above reasons, resource some of these seams would and reserve estimates need to be exclude them from being treated with caution. considered as mineable reserves under present economic On "paper" China has vast coal conditions due to the high cost of resources, yet there is a question as to extraction. how much of these reserves can be economically recovered. To estimate the The accuracy of coal reserve and quantity of coal that might be extracted resource estimates are ultimately limited (technically recoverable reserves), this by the quality of raw data which is data must be discounted to take account variable. Core recovery standards and of recovery losses due to geological core analyses are not consistently faults, washouts, poor quality coals, rigorous across China's coalfields. Lack seam thinning, pillars to protect surface of rigor in sampling, assay and reporting features, and mine structural pillars. For adds doubt to results of past exploration. geological reasons, not all of the The rationale of basing coal seam resources identified in preliminary quality on a clean coal sub-section 10 Optimizing extraction exploration will necessarily be alternative energy sources become convertible to reserves. more competitive. Increasingly scarce coal forces prices upwards, causing A broad estimation, based on demand for coal to fall due to more experience of geological complexity, efficient use of coal and consumers mining and other factors that inhibit coal switching to other fuels such as gas. recovery, is that 40 percent of the basic Production of coal, therefore, will start to reserves might be technically mineable decline long before basic reserves are (reserves) and 60 percent of the totally exhausted. resources may be convertible into basic reserves. Proportionally scaling the The trend of coal production rate over basic reserves and resource totals in the life of the reserves can be Table 2.1 to match the 2007 proven empirically represented by a bell-shaped resource in Table 2.2 yields an estimate curve. Hubbert (1956) first described this of 369 Bt basic reserves and 722 Bt process in an analysis of oil production resources. Applying the above factors in the USA in which he postulated that a gives total reserves of 321 Bt for the peak production would be attained that year 2007. cannot be exceeded. Tao and Li (2007) have used a computer model to apply Based on the 2007 proven resources, Hubbert's theory to a simulation of China would appear to have sufficient China's raw coal production. According coal in place to provide the 40 Bt likely to this simulation, a peak coal production to be mined from 2007 to 2020. Making of 3.34 ­ 4.45 Bt will reached between a highly speculative assumption that 2025 and 2032. The model predicts coal coal demand will level out at around 4 Bt supply falling to 2.34 Bt by 2050. The from 2020 onwards implies 65 years of underlying rigor of this analysis has reserves remain beyond 2020. This been questioned. Further analysis of the estimate assumes negligible imports and life cycle of China's coal resources is no further significant coal finds, but does therefore needed. assume that coal energy in the western Conventional coal mining becomes more regions will become economically difficult, costly, and hazardous as the accessible. Ramping net imports would mining depth increases. Depending on add nine more years of life. geothermal gradient, geological and gas factors, the practical limiting mining From the present (2008), therefore, depth using conventional technology lies China has an estimated 75-80 years of typically between 1000 m and 2000 m. technically mineable coal (reserves) The former limit seems to be applied in remaining. China. The composite, overall rate of coal China could potentially expand its coal production depends on geological and reserves substantially by developing mining factors which increase in underground coal gasification (UCG). complexity, thereby raising production UCG is a technically feasible technology costs as the most accessible, (Appendix 1) that is not constrained by geologically undisturbed, high quality coal seam depth. China has coals become exhausted. As coalfields implemented several pilot projects, but are intensively worked, basic reserves the technology has yet to be are reduced and at some stage a peak demonstrated on a sustainable production is reached after which mining commercial scale. becomes more costly and difficult and 2.2 Resource exploitation policy 11 Optimizing extraction The above analysis indicates that China and where exploration investment can probably support intensive coal exceeds 5 million yuan. mining beyond the mid-part of the 21st century. How effectively this resource is For an exploration project involving an exploited will depend on government area of more than 30 km2, MOLAR is policy. Current government policy responsible for issuing exploration identifies maximum coal resource permits. For lesser areas, local land and recovery as a priority, but a more resources departments are authorized to economically efficient result would be issue exploration permits. Where non- obtained by optimizing exploitation. coking coal reserves are greater than 100 Mt or coking coal reserves are Coal exploration and mining licensing greater than 50 Mt, the mining permit is policy and issues have been discussed issued by MOLAR. Provincial land and in a previous study (ESMAP 2004) resources departments are authorized to which should be consulted for additional issue mining permits for smaller detail. projects. Coal exploration In early 2007, MOLAR placed a Coal exploration of potential new moratorium on coal exploration due to coalfields is jointly financed by central concerns at construction of excess and local government and coal capacity in the coal mining sector. This enterprises. was a short term decision and symptomatic of the ineffective stop-start Each coal exploration project is controls that the Government uses to examined, approved, registered and attempt to balance supply and demand. licensed by the department in charge of The expected long-term trend for coal is geology and mineral resources under one of strongly increasing demand. If the State Council. The exploration this demand is to be met from local licensee must commit to minimum sources, there is a need for a steady amounts of exploration expenditure: increase in coal mining capacity and 2,000 yuan/km2 for the first year of continuous exploration. exploration, 5,000 yuan/km2 for the second year and 10,000 yuan/km2 for Allocating resources for mining each year thereafter. Surplus Allocation of mining rights has moved expenditure in one year can be offset in away from an administrative process the following year. Proof of expenditure where no value was assigned to the coal seems more important than reporting resources, to a more competitive and filing of results, so data may be process in which the successful bidder poorly collated and difficult to trace if or applicant pays a royalty fee to reflect required by third parties at some later the value of the resource. date. Exploration rights can be acquired by Bidding is not conducted if the applicant bidding and auction (as illustrated in is the exploration license holder, or for a Appendix 2) where the project is state mine expanding in compliance with local funded, where exploration rights have plans or where coal exploitation is being been forfeited or surrendered, or where developed under the auspices of a there are potentially large energy single enterprise. There are few barriers resources, for projects deemed of to the transfer of existing mining rights national importance and for projects in during enterprise reform, merger, sale or environmentally sensitive development formation of a joint venture provided areas. MOLAR handles applications there has been one year of full where resources straddle multiple production and all requisite fees have administrative areas, for offshore been paid. However, the scale of resources, for foreign invested projects exploration and mining rights requested must be compliant with general and local 12 Optimizing extraction plans and be consistent with resource Mongolia Autonomous Region. The aim protection policies and environmental is to stimulate an increase in resource protection regulations. recovery from the current rate of between 15 and 20 percent to a rate of In early 2007, China began introducing a between 40 and 50 percent. new coal exploitation system whereby coal producers must pay fees to The basis of royalty assessment, government to utilize the country's coal payment method and amount, as resources. The system, referred to as applied in Shanxi Province, is shown in the "paid utilization system", has been Tables 2.3 and 2.4. The royalty value of introduced into eight coal producing around 2.5-3.5 yuan/t reserves is provinces and regions, including Shanxi, broadly equivalent to about 1.2 percent Shaanxi and Henan and the Inner of the current coal price. Table 2.3 Paid use (royalty) for mining right in Shanxi Province Method by which Basis for valuation Method of Comment obtained mining assessment payment right Administrative 2004 reserves Direct or state- allocation owned share equivalent (if not private) Resource By agreement If not willing to be integration from integrated, the paid small mine closure use will be and consolidation implemented by public transfer Mines closed before Price of reserves 2004 doubled Table 2.4 Payment criteria for mining right in Shanxi province Category Price (yuan/t) Payment schedule Bituminous coal 2.48-3.03 na Anthracite 2.98-3.53 (3.3 for seams 2&3; na 2.7 for seams 9 & 15 <10Mt reserves or na Lump sum expanded reserves 10-20 Mt reserves na Installments completed within or expanded 6 months. First payment reserves >60% >20 Mt reserves or na Installments completed within expanded reserves 12 months. First payment >50% The royalty paid in return for mining governments are to be used for rights is allocated to provincial, city and environmental protection, public welfare, county governments in the following and compensation for owners of legal proportions: 3:2:5 where the mining right coalmines that have been closed under had been previously allocated a minimum capacity policy. administratively. In the event of open tendering for resources the split is 2:3:5. Advanced payment of a royalty excludes The royalties paid to county and city under-capitalized and non credit worthy 13 Optimizing extraction coal mining enterprises, and provides an waste to increase the energy recovery incentive to mines to increase efficiency from coal mining. to recover as much of the coal as it is cost-effective to do so. On the basis of In NSW, leaseholders are required to economics it is logical that coal will be lodge monthly returns and payment on recovered, provided that the price or before the 21st day of the month received exceeds the expected cost of following extraction of coal, and annual extraction plus the royalty. If there were returns on or before 31 July each year. no royalty, mining costs would be lower The collection of mining royalties is and so more coal would be mined. If based on 'self assessment'. It is the royalties are paid in advance of mining, responsibility of the mining leaseholder the royalty payments are capitalized. to calculate and promptly lodge the Therefore, it will always be worthwhile to royalty return. The government carries mine, provided the coal price is greater out a number of check audits annually to than the extraction cost. review the royalty returns lodged by lease holders. Such a system would be Advanced royalties also deter mines impractical to implement among China's from holding large tracts of un-worked small mines. reserves for which they cannot obtain finance to develop or for reasons of While the royalty charges are lower speculation. Independently accredited (equivalent to about 1.2 percent at a flat companies with qualified surveyors are rate value) than those imposed in the needed to provide the necessary USA and Australia, they are reasonable assessments and a dispute system for an industry undergoing major reform. established. Royalty charges should The fact that they are paid in advance in also accurately reflect the value of the China provides an incentive to maximize coal taking into account mining difficulty. recovery ­ a driver not required in Comparisons with royalty regimes in developed countries where extraction is other countries a function of the mining economics. In other major coal producing countries, However, the Government of China royalties are based on mining revenue. should consider the possible merit of For instance, in the USA the royalty on also charging an additional revenue- underground coal from Federal lands in related royalty to take account of the the USA is charged at 8 percent of gross changing value of the coal. mining revenue (Kepler et al 2004). Controls on approval for coal The coal royalty regime in NSW, exploitation Australia was revised in July 2004 when The Government exerts controls on coal a new ad valorem coal royalty was exploitation. No extraction is allowed introduced (State of NSW 2005). Under without permission and a technical this regime, a royalty is charged as a evaluation is required if: percentage of the value of production (total revenue less allowable · The coal is inferior, with high ash deductions). The coal ad valorem royalty and high sulfur content; rates are 5 percent for deep · The coal has low calorific value; underground mines (coal greater than · There is no market; 400 m), 6 percent for other underground · The coal could not be exploited mines and 7 percent for open cut mines. unless blended with other ranks of coal; Royalty is also payable on the coal · Complicated mining conditions content of coal rejects if they are used prevail; for producing energy. This would not be · There is a high risk of natural advisable for China as the Government hazards; or is attempting to encourage use of coal 14 Optimizing extraction · Extraction of the coal may damage the reserves. Typically across China, the coal recovery rate of the KSOCM is around On the basis of the technical evaluation 45 percent and that of the local and the provincial or local governments can private mines vary between 15 percent grant approval, but may impose specific and 20 percent, with the country conditions under which the coal can be average being 30 percent. In Shanxi, extracted. A coal industry which is arguably the most important coal mining allowed to make commercial decisions province, the average coal recovery rate on economic grounds has no need of is 39 percent. Reasons for low recovery such bureaucratic controls. are use of out-dated mining methods, poor management and low levels of mechanization. While 98 percent of Coal recovery rate mining in the KSOCM is mechanized, A vast wastage of coal resources has the level of mechanization is only 20 occurred due to lack of systematic mine percent in the LSOCM and less than 10 planning and use of archaic and percent in the TVCM. Consequently, inefficient mining methods. Some small thick seams are incompletely mined, mines encroached on the lease areas of recovery from medium-thick seams is KSOCM reducing reserves available for low and thin coal seams, which account mechanized mining. For example of the for 12 percent to 18 percent of the total 50 small mines in Hegang municipality in "reserves" in the province, are Heilongjiang, 48 operated within the abandoned. boundaries of large state mines (Wright 1998). Small mines often recovered no To improve their understanding of the more than 10 percent of available issues and practical problems resources (Zhongguo meitan bao, 16 preventing coal resource recovery April 1995) compared with KSOCM standards being achieved, MOLAR and which generally recover around 45-50 NDRC organized a nationwide survey percent. One estimate was that, in and inspection in mid 2005. This extracting 370 Mt of coal, the small involved an internal audit by coal mining mines sterilized 1.5 Bt (Wright 1998). It enterprises, general inspections by is therefore not surprising that the government departments and selected Government has sought means of spot checks by expert groups. Nineteen improving resource recovery. coal-producing provinces (prefectures, and municipalities) and two large coal Not only is minimum seam thickness to enterprises were inspected. The detailed be worked now specified, but the results have not been published but the amount of coal that must be recovered is general findings have. A steady rise in also prescribed. The coal recovery rate recovery rates over recent years was is defined as the ratio of the quantity of reported but improvements have not coal mined to the quantity of mineable been uniform. The best performance reserves. Regulations stipulate that the was recorded in the east and the recovery rate from mines with an annual poorest in the west where resources are designed capacity of more than 90,000t more plentiful. The main problems of coal shall not be lower than 85 revealed by the inspection were: percent for thin coal seams (0.7m -1.4 m in thickness band), 80 percent for · The computation of coal recovery medium-thick seams (thickness), not rates in some coal enterprises is not less than 75 percent for thick seams standardized and reported results are (thickness band), and not less than 70 therefore unreliable; percent for hydraulic coal mining. This performance should be achieved · Many medium-sized and small mines irrespective of geological conditions and do not have professional geologists mining economics. or other technical specialists who are able to provide reliable data; 15 Optimizing extraction · The mining technology and mine construction and control of techniques used have constrained coal production, with special the coal recovery rate at some mines. attention to scarce resources Intensification of mechanized mining such as coking coal. in large and medium sized coal enterprises, especially mechanized Of the above, items 1 and 3 have been full seam height extraction, has addressed by the pre-paid royalty. resulted in coal loss where seams Detailed specification of regional are thick but locally variable; recovery rates in item 2 would be too · Loss of coal in pillars in faulted prescriptive and impractical to implement and item 4 suggests zones, in room and pillar operations customary planning controls rather than and the abandonment of some thin allowing the market to decide. seams; · The fully mechanized sub-level Regulating and reserving use of caving method has improved resources productivity but the recovery rate of It is questionable whether exploitation of coal is still low; all economic reserves should be allowed · Small coal mines that have not yet provided the requisite approvals are introduced total extraction mining obtained. Coal is a finite resource methods; and essential for meeting China's long-term energy needs and unless its uses are · The implementation of environmental regulated, strategic reserves will not be protection policies has raised available when they are needed. China environmental awareness. However, has substantially less than 100 years of increased awareness has raised coal resources accessible by current, concerns with subsidence and this conventional mining technology. There has cause mine managers to reduce may, therefore, be some justification for recovery rates. prioritizing coal use for thermal power generation in modern, efficient low Wang Xianzheng (China Energy emissions plant to meet China's long- Strategy High Level Forum, 9th term energy needs. Exposition of Sciences, (July 2006) stipulated the following four reforms However, there is a dichotomy between considered necessary to improve coal reserving thermal coal for power recovery rates in China: generation due to the continuing rising demand and the limited, finite resource 1. Apply a mineral resources tax available and using more coal for based on an assessment of synthesis of petroleum derivatives to reserves. reduce reliance on imported petroleum. 2. Determine suitable recovery Free markets recognize the value of rates for different regions and some products and no policy provisions categories of coal seams, and are necessary. For instance, there is no establish a strict system of need to specifically reserve coking coal supervision with penalties for metallurgical purposes, as the high imposed where serious market price for this grade of coal contraventions are identified. automatically assures its final use. 3. Raise the threshold of market access to motivate more coal Free markets throughout the whole enterprises to value resources supply chain would theoretically yield the and make rational development most economically efficient result for all and utilization of resources. coal products. However, few, if any, 4. Strengthen guidance on coal countries are unable to totally relinquish development planning, scale of control on prime energy sources for 16 Optimizing extraction reasons of preserving national security conserves its indigenous gas resources and to ensure sufficient energy for a similar reason. The NDRC has independence to protect society and stated that extensive coal resources in industry against any short-term Xinjiang represent China's strategic fluctuations in international trade. It is energy reserves. However, no policy therefore reasonable to expect the mechanism is evident for identifying and Government of China to protect its protecting the resources and specifying energy security by preserving a strategic the conditions in which they can be resource of coal as a buffer against exploited. interruptions to imports. The USA 2.3 Coal resource policy reform needs Current coal exploitation policies follow The minimum thickness of coal seams the traditional administrative approach of that must be included in reserves, and in setting standards without providing the feasibility studies and also which must detail, and strengthening control rather be worked under the terms of mining than establishing a performance leases, are stipulated by regulation in oriented regulatory framework. The China. This is in contrast to most other negative aspects of the Government's coal producing countries, including current "resource protection" policies Australia and the U.S.A, where the mine are: operator determines what coal can be worked safely and economically within · Enforcing recovery rates could the prevailing market conditions taking reduce the profitability of mining if into account geological, mining, companies are forced to mine environmental, resource, and other uneconomic coal which could also constraints. Resource recovery is not exacerbate safety and considered a major issue in these environmental problems. countries. Maximizing resource recovery is unnecessary. What is important is to · Enforcement of prescribed optimize resource recovery which minimum thickness of seam to be involves making mining decisions that worked will result in continuation of maximize the net present value of the manual and semi-mechanized resource. extraction methods in thin seams contrary to government policy to The policy to encourage maximum fully mechanize the mining industry resource recovery may tempt mine to reduce numbers of miners at owners to minimize support pillar sizes risk and to maximize coal and to mine into pillars of protection extraction rates. beneath sensitive surface features such as water courses and villages. This · Stringent enforcement of resource policy must therefore be supported by protection regulations will mean stronger safety regulation enforcement that overall productivity and safety in mines and more rigorous monitoring will not reach standards of mining induced surface impact. There comparable with those in is also a danger that this policy will advanced coal mining countries. encourage mining of poor quality coal to maximize revenue to offset royalty charges. 2.4 Recommended policies to improve efficiency of resource exploitation 17 Optimizing extraction If its coal markets work efficiently, China recovery rates and minimum seam can ensure that its coal resources are thicknesses to extract. The pre-paid optimally utilized. Thus, China is likely to royalty scheme for coal, based on the achieve maximum benefit from the value of the resource, should therefore utilization of its finite coal resources. be introduced across all coalfields in China. Advanced payment of a royalty Not all exploration projects result in the excludes under-capitalized coal mining discovery of mineable coal reserves. enterprises, and provides an incentive to Further, the process of proving reserves, mines to increase efficiency to recover determining feasibility, mine planning as much of the coal as it is cost-effective and approvals can take up to five years. to do so. The pre-paid royalty element is Due to the significant risk and long lead relatively low compared with revenue times, there should be no impediment to based royalties incurred in other mining allowing exploration to proceed as far in countries. The merit of charging an advance of demand as is judged to be additional, modest royalty linked to the commercially viable. This will facilitate value of the product should be timely delivery of coal to meet market examined. This would ensure that the demand and ensure there is a bank of coal owner (government) was reserves ready for developing when compensated for the true value of the required. The MOLAR moratorium on resource. exploration should be withdrawn because market prices provide a better The Government has identified the coal guide to the industry as to when to resources in the west of China as increase exploration activity and when to "strategic reserves" to ensure energy reduce it. The timing of exploration security in the event of unexpected should be a matter for the holder of the downturns in international energy supply mining rights to determine on markets. There should be no policy commercial grounds and government incentives for coal-to-liquid (CTL) intervention is unnecessary. installations due to the high economic cost and inefficient use of valuable coal Prescriptive resource recovery resources in these remote areas. standards, which specify minimum seam thickness and recovery rates, have been Current assessments of coal resources introduced by government with the aim are based on exploitation by of improving resource recovery. These conventional mining methods. The factors prevent economic efficiencies economic and financial viability of being realized through market alternative methods for extracting mechanisms. Resource recovery factors energy from seams that are too deep or are not specified in other major coal difficult to mine conventionally should be mining countries and to enforce them in investigated to extend the life of China's China could cause mine owners to coal resources. The European deep subject mine workers to unacceptable UCG technology as a source of energy safety risks or encourage mining of dirty, for power generation could be polluting coals. Resource recovery competitive with alternative fuel sources factors should be abolished as the once commercially proven. A first stage market will optimize recovery rates from could be to review current UCG a social perspective provided it is facing technologies, the experiences from the undistorted market prices and bearing existing projects in China, and issues the full costs of production (financial, and barriers encountered, and to health and safety and environmental). determine a strategy for future research, development and commercialization. In Coal mines will optimize extraction of parallel with the technical appraisal, a coal resources in a free market, where a geological assessment should be royalty is paid in advance based on undertaken to identify additional reserves, without the need to specify potential coal resources that UCG 18 Optimizing extraction technology could access. These proposals would complement existing State Government policy to demonstrate the application of UCG to low quality and difficult to mine coal seams. 19 Coal supply infrastructure Chapter 3 Coal supply infrastructure China's coal resources are widely, but in eastern areas, where only 38 percent unevenly, distributed over a total coal of the coal resources lie. Therefore, the bearing area of 600,000 km2. Coal capacity of long distance transport resources are more concentrated in the infrastructure is critical to the coal supply north and west than in the south and chain. Delivery of coal to satisfy market east, and the regional distribution of coal demand not only depends on coal resources tends to be inversely related resource and mine production capacity, to the distribution of economic activity. but also on the supply chain The mismatch is illustrated in Table 3.1. infrastructure linking the producer and 80 percent of China's GDP is produced the user. Table 3.1 Regional coal production and consumption in 2004 (Mt) Coal Coal Net input (+) Area consumption production net output(-) Beijing 25.2 7.5 17.7 Tianjin 30.1 0 30.1 Hebei 146.4 75.8 70.6 Shanxi 192.3 565.1 -372.8 Inner Mongolia 97.6 236.7 -139.1 Liaoning 102.4 63.8 38.6 Jilin 49.0 26.6 22.4 Heilongjiang 63.0 97.4 -34.4 Shanghai 44.1 0 44.1 Jiangsu 113.8 25.9 87.9 Zhejiang 71.78 0.4 71.3 Anhui 67.1 78.4 -11.3 Fujian 32.6 15.3 17.3 Jiangxi 33.8 20.5 13.3 Shandong 156.6 130.4 26.3 Henan 128.0 149.6 -21.5 Hubei 69.0 10.5 58.5 Hunan 51.8 49.1 2.7 Guangdong 75.4 3.0 72.3 Guangxi 28.9 6.2 22.7 Hainan 4.1 0 4.1 Chongqing 24.9 33.1 -8.2 Sichuan 70.2 80.9 -10.7 Guizhou 68.5 106.2 -37.6 Yunnan 48.8 64.8 -16.0 Shaanxi 42.5 158.1 -115.6 Gansu 29.8 35.9 -6.08 Qinghai 5.8 5.6 0.2 Ningxia 23.7 26.5 -2.9 Xinjiang 31.1 39.4 -8.3 Source: CCII 20 Coal supply infrastructure Rising domestic coal prices, mining operations in Shanxi. An continuously rising demand and additional 63 GW of power generation domestic transport infrastructure capacity will be introduced, a quarter of limitations are increasing the demand for which will be thermally coal based in the imports which are, in turn, dependent on south-east of China, remote from the the capacity of transport, both for main centers of coal production. Internal domestic and international movement of rail transport capacity limits will constrain coal. domestic supplies but demand can be balanced by imports. The Government According to the NDRC, 2008 Outlook is expecting coal price rises, but will for Coal Demand and Supply, at least intervene if it considers them to be 250 Mt of coal production capacity will excessive. Unfortunately, such a enter operation in 2008 but the annual restriction will inhibit investment in coal growth in coking coal output capacity will transport by rail and ship, as well as fall from 22 Mt in 2007 to 18 Mt in 2008, complicate the negotiation and mainly due to the closure of many adherence to long-term supply contracts inefficient, polluting small-scale coal by domestic and overseas suppliers. 3.1 Current status China's current ability to supply coal to International coal trade is small in its industrial, commercial and household comparison to domestic trade and is consumers depends largely on domestic subject to ad hoc policy adjustment by coal production, imports and the government. For instance, China capacity of its national transport expanded its coal export capacity in networks of rail, road and waterway. response to concerns about a possible domestic over-supply in 2003 that was The flexibility of domestic coal soon absorbed by internal growth in production and supply is dependent on energy demand. Since then exports the quantities of coal held in stockpiles, have fallen annually, but not as a result the availability of surplus production of free trade. The Government has been capacity at mines, the speed at which strengthening its control over coal new production capacity can be added, imports and exports by adjusting export and imports and bulk coal transport quotas, export tax and tax relief with the infrastructure. aim of discouraging exports and promoting imports. Exports have Stockpiles can buffer relatively small reached no higher than 93 Mt and spikes in demand but sustainable supply imports did not exceed 10 Mt until 2002. increase is largely dependent on new Imports attained their highest volume in mine capacity. Large stockpiles that 2007 (Table 3.2) and are likely to occasionally arise at mines and ports continue rising annually. The proportion are indicative of transport infrastructure of coal imported compared with problems. domestic production amounted to 2 percent in 2007. International coal trade Table 3.2 China's international coal trade (1992-2007) Year Export (Mt) Import (Mt) Net export Mt 1992 19.7 1.2 18.4 1993 19.8 1.4 18.4 1994 24.2 1.2 23.0 21 Coal supply infrastructure 1995 28.6 1.6 27.0 1996 36.5 3.2 33.3 1997 30.7 2.0 28.7 1998 32.3 1.6 30.7 1999 37.4 1.7 35.8 2000 55.1 2.2 52.9 2001 90.1 2.7 87.5 2002 83.9 11.3 72.6 2003 93.0 10.8 82.3 2004 86.7 18.6 68.1 2005 71.7 26.1 45.7 2006 63.3 38.3 25.0 2007 53.2 51.0 2.2 Source: CCII Until recently, China's energy coal Port capacity for coal handling is an supply was largely derived from its own important element of China's internal mines, but a 34 percent rise in imports transport infrastructure as well as reduced net exports to 2.2 Mt in 2007 providing a gateway for international (Xinhua, 19 January 2008). China is traded coal. In 2007, the coal volume likely to become a net importer of coal loaded at major ports in China was 463 for the first time in 2008. Exports have Mt (Table 3.3). Of this total, coal been suppressed by a 10 percent export transported for coastal domestic trade tax on thermal coal after having was 411 Mt and exported coal was 52 introduced a 5 percent export tax for Mt. coking coal. Not all coal mines are free to export coal. Currently, only four The Government is planning for domestic large-scale enterprises have a increased sea-borne coal transport by coal export license3. raising port capacity. By the end of 2007, China had over 14 ports of 100Mt, Most of the imported coal will enter 1403 deep-water berths of 10,000t and China through the southern provinces of above with an annual handling capacity Guangdong and Fujian. Shortfalls in coal about 3,400 Mt. Domestic coal is supply to coastal regions can continue to transported from northern areas to be met by imports, subject to any southern areas through the loading ports unforeseen port and transport capacity of Qinhuangdao, Tangshan, Tianjin, constraints. However, saturation of rail Huanghua, Qingdao, Rizhao and transport will hinder inland transfer of Lianyungang. By 2007 there were 7 coal imports as equally as it hinders northern coal transportation ports with a domestic supplies. total loading capacity of 495 Mt. In eastern China and the coastal areas of An agreement to export an average 1 southern China, there are 122 unloading billion KWh of electricity per year for 10 berths for coal of which 75 are deep- years from China to Vietnam starting in water berths, with a total unloading May 2007 is also tantamount to capacity of 270 Mt. exporting coal resources, but is not similarly constrained. Port capacity 3 China National Coal Group Corporation, Shenhua Group Corporation, Shanxi Coal Import & Export Group Company and China Minmetals Corporation. 22 Coal supply infrastructure Table 3.3 Coal quantities loaded at major ports in China (Mt) Ports 2001 2002 2003 2004 2005 2006 Qinhuangdao 100.07 97.92 109.59 130.81 144.74 186.00 Jingtang 9.64 11.47 12.92 14.21 13.60 14.37 Tianjin 52.59 56.37 55.74 62.91 68.94 48.00 Huanghua 0.18 6.53 31.56 45.31 66.89 80.30 Qingdao 15.58 16.87 12.18 9.05 7.96 8.23 Rizhao 22.86 22.74 22.60 19.75 19.52 17.44 Lianyungang 15.69 15.26 13.69 11.58 11.48 9.51 Others 5.45 16.88 18.79 44.03 37.87 42.49 Total 222.1 244.0 277.1 337.7 371.0 406.34 Qinhuangdao is the most important coal ocean transport. This confirms that at port handling over 45.78 percent of the present the main driver for port coal trade in 2006, followed by expansion is coastal trade. China will Huanghua with 19.76 percent. The need to develop port capacity for larger expansion of the Qinhuangdao port is ships to minimize transport costs if continuing at a rate of 65 Mt each year. demand for coal imports rises as Government plans are for the number of expected. dedicated coal berths in northern coastal areas to increase to 56 by 2010 to The maximum coal handling capacity of provide a total capacity of 520 Mt. major coastal ports could be Finance for port expansion is coming approaching 900 Mt by 2010. The actual through SOEs but there are no quantities handled and the proportion of obstacles to FDI entering this arena. imports to coastal trade will depend on domestic coal production, internal As port capacity is expanded, it must be transport constraints, transport costs, matched by rail capacity. Coal port building programs, availability of transportation should therefore be bulk carriers and international coal viewed as an integrated system. In prices. 2006, the total capacity of railways to the seven northern ports was 47 Mt greater Rail transport capacity than that of the cargo volume of those ports. However, as imports continue to China relies heavily on railways as the increase a stage may be reached when lowest cost means of mass onshore transport becomes the limiting transportation; the energy consumption factor. ratio of transportation by air, road and railways is 11:8:1. According to China's COSCO (China Ocean Shipping Co), railway statistics, only sufficient freight China's biggest shipping company, wagons can be supplied on average to expects US$49 billion in spending on meet 40 percent of demand. ports over the next five years. This includes the ports of Nantong in Jiangsu China's Minister of Railways, Liu Zhijun, Province, Tianjin, Qinhuangdao and the illustrated the scale of the rail transport new Caofeidian Port in Hebei Province. infrastructure problem when he stated The latter is initially expected to have an that China has been using 6 percent of annual capacity of 50 Mt of coal, the world's operational railways to move eventually reaching 200 Mt. 23 percent of the total people and freight transported by the world's railway Few, if any, ports currently systems each year. In an effort to rectify accommodate large, cape-size dry bulk this deficiency, China plans to invest carriers (approximately 165,500 dwt) around US$160 billion from 2007 to that represent the most cost-effective 2012 (Wang Hui, China plans five-year 23 Coal supply infrastructure leap forward of railway development, eased following substantial price rises in Peoples Daily online, 30 September 2004 resulting from infrastructure 2006). bottlenecks (Melanie and Austin 2006). Many mines are located in areas that The total amount of coal transported in require coal to be transported over each year between 1980 and 2007 is significant distances to major industrial shown in Table 3.4. By 2020 rail centers. Transport links are particularly transport requirements for coal could vital to maintaining coal supplies to reach 2.9 Btpa. Assuming that 50 power plants. In 2007, coal transported percent of total rail freight is coal, a total by rail exceeded 1.22 Bt. Almost half of rail freight capacity of 5.8 Bt will be the material transported by rail in China required in 2020. This represents an was coal in that year and over 60 increase of 3.1 Bt or 216 percent of the percent of domestically mined coal was 2005 freight capacity over a 15 year transported by rail, over an average period. Such an expansion requires distance of 500 km. detailed advance planning and will involve substantial financing. Some of Distribution constraints have led to major the growth in capacity will be achieved consumers of coal located in southern through efficiency increases arising from provinces of China purchasing imports, use of larger trains and freight wagons as well as mines in the north increasing and faster train speeds, but mainly it will exports. This situation has arisen from involve the construction of new track. insufficient transport capacity in periods According to NDRC projections (NDRC of peak electricity production. Tightness 2007), coal transportation capacity by of supply caused by transport rail will increase by only 60 Mt in 2008, constraints not surprisingly results in not an auspicious start to addressing coal price rises. In 2005, coal prices future rail capacity needs. stabilized as distribution constraints Table 3.4 The amount of coal transported by railway in China 1980 to 2007 Year Total goods Coal (Mt) Coal share of Annual Average (Mt) total (%) growth rate distanc of coal e (km) transport 1980 1086 415 38.2 5.0 426 1986 1322 531 40.2 4.2 522 1990 1462 629 43.0 4.3 548 1995 1592 674 42.3 1.4 561 1996 1616 721 44.6 7.0 562 1997 1617 703 43.5 -2.4 554 1998 1532 641 41.8 -8.9 553 1999 1569 649 41.4 1.3 550 2000 1655 685 41.4 5.6 552 2001 1786 766 42.9 11.8 558 2002 1880 818 43.5 6.8 560 2003 1998 881 44.1 7.7 na 2004 2178 992 45.5 12.6 na 2005 2247 1071 48.0 8 na 2006 2444 1120 45.8 4.6 na 2007 2612 1221 46.7 9 na Source: "China Electricity and Coal Industry", 2004, China Coal Industry Publishing House. Economic Information Daily, 24 Feb 2006. 24 Coal supply infrastructure The Government has introduced policies administration. Within the natural to reduce pressure on rail transport by monopolies, [such as railways], the encouraging greater coal use at source, recommendation was that competition such as mine-mouth power-plants and should be introduced together with, coal-chemical industry development, but where possible, new entities (Liu Shijin as no specific targets are evident it is et al 2001). difficult to quantify their effectiveness. In a market situation such policies would Reform of the railway sector is not be necessary in any event. The progressing. A number of rail concentration of new power plant and construction enterprises have been industry in the populous coastal regions established and train companies are the will probably limit the impact of the policy next step. On 7 December 2007 China to the western development regions. Railways Group Ltd (China Railway) The large distances between major listed on the Hong Kong stock mining areas in the west and high- exchange. Further listings are imminent demand consumers in the east and the as the Ministry of Railways experiences resulting high transportation costs, difficulties in financing its plans. In the especially for low heat value coals, may first 8 months of 2007, fixed asset make a policy of building mine-mouth investment in the railway sector was power plants and transmitting coal-by- US$15.2 billion, representing only 44 wire a feasible alternative option. percent of planned investment. Ultimately, any decision should be made on economic grounds. The Government has introduced various measures to raise the scale of Recognizing that rail transport capacity operations and to increase efficiency. is insufficient, government policy has Measures that have been implemented been to adjust transport priorities in for increasing the coal freight capacity of response to specific supply problems as the rail network are: they arise, but not without creating unplanned side-effects. For example, · Building new track in parallel to during September and October 2003, existing track; shortages of food in the northern · Building dedicated coal railways; the provinces resulted in the Government first being the Daqin Railway, linking giving other products priority for rail the Datong coalfield in Shanxi freight for at the expense of coal. A Province to Qinhuangdao port in consequence of the change in rail Hebei Province; allocations was a reduction in coal stocks at power plants and at ports. At · Modernizing track to allow for faster least ten of the largest power plants in and heavier trains; Shanghai, Guangdong, Zhejiang, · Constructing large, modern coal Jiangsu and Fujian provinces loading and unloading facilities to experienced coal shortages (Platts reduce turnaround times (in 2003). Following the shortages, the collaboration with customers); Government readjusted allocations in favor of coal rail freight (Tian 2004). · Introducing 80t coal wagons; · Raising freight train speeds to 120 The State Council's research km/hr on all tracks by 2010; organization has identified necessary reforms, especially within the natural · Introducing high-load trains; the monopolies and public utilities, for Daqin Railway started running moving towards a market economy. 20,000t coal trains in March 2006. SOEs should be reformed into corporate structures, the level of state ownership Capacity allocation to coal suppliers is lowered and enterprise management dependent on various factors, including separated from government 25 Coal supply infrastructure commercial, market and government investment. Uncertainty over whether or control: not the Government will fully allow · Contractual arrangements between market forces to come into effect for rail transport for strategic commodities such the Ministry of Railways and coal as coal remains a serious barrier for users; many potential investors. · Competing demands of other commodities and passenger trains; The Ministry of Railways priorities for 2007 were the construction of rail lines · Government intervention to reduce for passenger transport, and coal social impact resulting from any transport and inter-regional connections. prevailing shortages. It allocated 332 billion yuan (US$42 billion) for the construction of new lines While annual coal order meetings and to purchase rolling stock for the between coal mining enterprises and year. Railway track is a natural power producers are no longer monopoly, but the provision of rail freight orchestrated in detail by the NDRC, firm services above the track is a competitive coal orders must be in place before rail activity as demonstrated in many freight contracts can be agreed. countries that have introduced competition. For example, the UK The Ministry of Railways is developing Government has liberalized train strategic partnerships with key coal operations allowing qualified, customers to increase the scale and independent companies to compete to efficiency of transport services. provide services. Customers transporting over 1.0 Mtpa are provided with a comprehensive, Full rail freight privatization may be too customized service to ensure prompt ambitious for China at present but a start allocation of capacity and reduced has been made. The long-term needs of bureaucracy. Government regulations the coal sector can be satisfied provided prohibit mining enterprises contracting the Government increases transparency for less than 0.2 Mt from receiving a of rail pricing, invests in increased priority transport allocation. infrastructure and capacity to match Shortage of rail transport capacity for projected coal transport needs, and coal, exacerbated by disruptions due to allows freer access to the network. heavy snow in the unusually severe winter weather experienced by southern Road transport China in early 2008, once again led to power plants exhausting limited stocks In recent years, coal transport by road of coal. Initial blame placed on the has been growing rapidly due to railways for inadequate capacity and saturation of the rail network and the planning may not be warranted. opening up of new mining areas not yet Although the situation caused by served by rail. The road transport exceptional weather conditions could not capacity of existing highways has been have easily been predicted, larger winter constrained, for sound reasons, by coal stocks at power plants would have enforcing loading weights to reduce reduced the impact on power supplies. damage to roads and improve the safety of road haulage operations. New roads The Railway Ministry considers that are planned to provide access to new China needs to spend US$240 billion mining areas in the mountainous expanding its rail system but the period regions. For example, a coal highway of implementation is not stated. from Tuoketuo, Huhehaote to Hebei is According to the WTO timetable, China's scheduled to be constructed to allow the rail infrastructure should be opened to development of over 10 Mt per year of foreign investment by 2008. However, coal capacity in the west part of Inner government intervention in pricing Mongolian that is currently inaccessible. remains a major obstacle to foreign 26 Coal supply infrastructure Shanxi is the largest inter-provincial Mt more than it exports in 2030, but coal-exporting province in China with current signs indicate that this has been total coal export sales volume in 2007 of vastly under-estimated. According to the 536 Mt. Of this sales volume, 128.55 Mt China Securities Journal (November was transported by road, 11.22 percent 2007), China will import between 150 Mt more than in the previous year. Rail and 230 Mt of coal per year by 2010, transport is more efficient but trucks are significantly higher than a previous needed to transport coal from small estimate of 70 Mtpa. The new prediction mines and other mines that do not have is based on a China Coal Industry rail links to the rail loading points. Association report that China's annual coal output will grow at the moderate Inland barge transport rate of 3.5 percent between now and To alleviate internal transportation 2010, increasing the country's annual constraints, the Government plans to coal output by 400 Mtpa to 2.8 Btpa by utilize its extensive water network in the 2010. Yangtze River Delta, Pearl River Delta and Bohai Bay area. Handling capacity International coal suppliers, given in three major harbor groups is planned suitable signals (and the absence of to be doubled, reaching 3.5 Bt each barriers to imports) can help to smooth before 2010. This will reduce delays in China's future coal supply imbalances. deliveries of coal, iron ore and oil. International coal producers in the major coal exporting countries are gearing for Domestic coal export contracts an expected rising thermal demand from China, but the amount of coal that can Existing long-term export contracts are ultimately be supplied will be determined difficult to manage in the presence of by sustainable development and government measures to control exports resource limitations in the countries of through quotas and taxes. Reduced origin. If there are supply constraints, export quotas and the removal of tax prices will rise resulting in a reduction in incentives may have been important the rate of increase in coal demand. factors leading Chinese suppliers to Provided China's coal markets are open suddenly increase the prices demanded to trade, demand for coal will generally for contracted tonnage sales to both be met, although prices may be Japanese and Korean long-term somewhat higher than their current customers (McCloskey, 2007). In the levels. There will be no coal supply early part of the 2007 contract year, imbalances ­ coal prices will adjust to Chinese suppliers were demanding ensure that coal supply (from both prices from Japan for Datong brands of domestic and import sources) will be US$74.50 per tonne FOB, a US$21.53 sufficient to meet coal demand in China. rise on the previous year. In the case of the Koreans, the Chinese suppliers Ocean trade asked for an increase of US$10-plus per tonne. The Japanese totally rejected The United States with 26 percent and this price increase. Such incidents the former Soviet Union with 23 destabilize the market and are not percent account for nearly half of global conducive to the acceptance of long- coal reserves, followed by China (12 term contracts by overseas buyers or percent), Australia (8 percent), South sellers. Africa (5 percent) and Poland (2 percent). The six largest exporters of External coal resources coal in 2004 were Australia, Indonesia, China, South Africa, Colombia, and the Primarily as a result of China's growing United States. Australia has large demand for coal, large increases in reserves of high quality coal that is imports of both steam and metallurgical suitable for both electricity generation coal are projected for Asia. According to and industrial applications. IEA (Coal the IEA, China is expected to import 2 Outlook, 2006) projections show 27 Coal supply infrastructure Australia as the world's foremost coal ability to be handled by removing exporter through 2030, followed by inherent moisture. The Indonesian Indonesia. Australia and Indonesia both Government plans to cap its coal benefit from their highly productive exports at 150 Mtpa to ensure energy mines and proximity to Asian markets. security, although there are suggestions Colombia, a relative newcomer to from within the industry that this quantity maritime coal trade, is expected to be might already have been exceeded. the third largest exporter of coal in 2030 and Vietnam is projected to increase its Overland imports share of world coal trade to 5 percent in 2030. There are coal resources in countries bordering China which could not only In anticipation of future coal trade provide a buffer against production volumes, exporting countries are shortfalls, but also contribute to China's investing in their port, coal mining, and long-term coal needs. coal transportation infrastructure. In Australia, there are plans to expand the There are large resources of coking and total export capacity of its coal terminals thermal coal in Mongolia and the at Abbot Point, Dalrymple Bay, Hay Shenhua Group has been mandated by Point, R G Tanna, Barney Point, and the Government to negotiate access to Fisherman Islands by about 55 Mt by exploit the reserves on behalf of China. 2010. In addition, a feasibility study in The Shenhua Group has demonstrated Australia is underway for a terminal at its ability to bring coal production on Wiggins Island in Queensland with a stream from zero to 107 Mt in 12 years throughput capacity of 22 Mt. There are from 8 mines and has the technical also plans to expand rail transportation capacity to develop the Mongolian capacity in Queensland to 281 Mt. coalfields. It also has the credibility to finance and construct a high capacity rail Anticipating rising coal imports by China, transport link across the Gobi desert. South Africa's Richards Bay Coal Terminal recently announced plans to A sole customer position ensures a low spend US$150 million to increase its cost supply to China due to the weak capacity by at least 28 percent, making it negotiating position of land-locked the world's biggest coal export port, Mongolia. A market price would need to rising from 72 Mt to 92 Mt by July 2008. be agreed to fully compensate Mongolia for the exploitation of the resource and Rapid growth in low rank (high moisture, for the necessary environmental and low ash and low sulfur content) safety protection. This is a supply option Indonesian coal output has been that could be financially viable for China projected for 2007, some of which is and should be considered as part of its likely to be destined for China. In coal mining strategy, but with an Indonesia there are plans to raise approach that is sensitive to the thermal coal production by about 10 development aspirations of Mongolia, percent in 2007 to 196 Mt, although and the application of international much of this coal will be of low heat standards of safety, social and value and therefore relatively costly on a environmental protection. per energy unit transported basis. For this reason, increasing quantities of the Vietnam exports anthracite to China but output will be destined for local power export taxes (tariffs are taxes on generation plants. In anticipation of imports) have been imposed by Vietnam higher coal prices, investors are looking to limit these exports and to allow at building coal upgrading plants. This development of what it sees as being will involve investment in new more lucrative markets. The response technology to increase the calorific value of Vietnam is a manifestation that China of low rank coals without losing the is too accustomed to low-cost coal and must start to recognize that sustainability 28 Coal supply infrastructure of coal mining is a global imperative and coal resources in Xinjiang have been that the cost and pricing of both classified by the Central Government as indigenous and external coal supplies a national strategic reserve. At some should reflect true economic, social, time in the future this strategic reserve safety and environmental costs. will need to be brought into production. The lack of detailed coal exploration and Western China developments development, limited infrastructure, skills Coal resources are important to the shortage and the long distance and development of the isolated and limited transport capacity for carrying relatively backward western regions of bulk freight to the south and east of China. The Government has already China are barriers to the exploitation of introduced policies to encourage this coal for which solutions would need investment in industrial development in to be identified. these areas. Local industrial growth will drive coal demand. Government also Various logistical options for energy plans to develop a west to east transfer include new rail links, low-loss electricity transmission scheme. This power transmission from mine-mouth "coal-by-wire" infrastructure project will power plants together with more increase coal demand in the west to innovative suggestions of long-distance satiate power demand in the east. pipelines for coal suspensions or However, such a project is only realistic gasification products. Box 3.1 illustrates if it is economically viable. If it is not a methodology for selecting optimum viable, the optimum economic value of coal transport solutions. However, the western coal reserves will not be current indications are that high volumes realized. of coal in Xinjiang could be consumed for chemical use, thus reducing China's The remote coalfields of Xinjiang can be long-term coal-fired power generation considered as external coal resources potential. for practical purposes. The extensive Box 3.1 Choosing the most suitable coal energy transport options There are similarities between the USA and China in the importance of rail transport for coal distribution in the interior of the country and also the long-term dominance of coal for power generation due to extensive domestic resources. In the USA a ton of coal is transported an average distance of 1287 km. A hybrid life-cycle analysis is critical for evaluating the cost, efficiency and environmental tradeoffs of an energy supply system, according to Bergerson (2005) whose studies show that if a small amount of additional coal is to be transported, current rail infrastructure should be used where possible. If entirely new infrastructure is required, mine-mouth power generation options are cheaper but these have a greater environmental impact due to the increased generation required to compensate for transmission line losses. Gasifying the coal to produce coal gas shows promise in terms of lowering environmental emissions. As a specific case study, Bergerson and Lave (2005) examined the life-cycle costs, environmental discharges and social impact of transporting coal via rail, coal gas via pipeline, and electricity via reasonably efficient high-voltage, direct current transmission lines from the Powder River Basin in Wyoming to Texas. They concluded that where no infrastructure exists, greater distances and larger amounts of energy favor coal transport by rail and gasified coal by pipeline over electricity transmission. 29 Coal supply infrastructure Their research shows that for the transport of over 9 GW of power over a distance of approximately 1,600 km the lowest cost option, and the lowest environmental impact, is to use a gasifier and methanation process to convert the coal to synthetic natural gas and transmit it via pipelines. The above analysis is site specific, but the principles are valid and similar studies should be undertaken in China to determine the best long-distance transport options for coal and coal-derived energy. This approach has particular relevance to China's development strategy for the coal resources in Xinjiang which are in danger of being under-utilized through failure to address long-term thermal coal supply needs for China. Long-term analysis, focusing on the implications of a high coal use future, show that when advanced technologies such as an integrated gasifier combined cycle (IGCC), where carbon capture and sequestration are used, emissions during generation decrease to a level where environmental discharges from extraction, processing and transportation become the dominant concern. Gasification-based technology, such as IGCC, is arguably the only environmentally friendly technology that provides the flexibility to co- produce hydrogen, synthetic natural gas (SNG), and premium hydrocarbon liquids, including transportation fuels and electric power, in desired combinations from coal. The US Department of Energy is conducting research into this field to assist development of a strategy to make optimum use of the USA's extensive coal resources which have a projected life of 250 years (Turk, 2006). However, according to skeptics (or some analysts) a carbon tax of US$46 per ton may be necessary to force switching to IGCC for power generation from conventional pulverized fuel (PF) power plants. A possible long-term solution in a carbon constrained world for Xinjiang could involve IGCC power generation with carbon sequestration and hydrogen as a transportable co- product injected into existing natural gas pipelines; up to 3 percent hydrogen can be added to with negligible impact on transportation and end-use efficiency and costs. Alternative coal-energy transport the project. A combination of clean, modes efficient IGCC power generation and Bulk solid coal can be transported by hydrogen or syngas transport is worthy rail, road, sea or waterway, but there are of further study by the Government (and alternative options for transmitting coal the private sector) in developing its long- energy from producer to customer which term strategy for coal energy supply and may reduce delivery costs, increase distribution. The simpler alternative of distribution flexibility or provide a higher gasification and gas pipeline transport value product to offset transport costs should also be examined. It must be from remote sources. These alternatives stressed that a priority use of coal for include electricity transmission from hydrogen generation is not being conventional PF mine-mouth power suggested as this has similar limitations plants, combined gas and power in terms of useful energy recovered to generation in centralized local or mine- CTL. mouth power plants or gasification and pipeline transport of the gaseous Coal pipeline product. Coal slurry technology involves transporting pulverized coal suspended In planning the timeline for implementing in water and pumped through pipelines. critical elements in a coal mining sector The mined coal is crushed, formed into strategy, allowance must be made for slurry, suspended in water, and pumped detailed examination of coal energy through the pipe to the power plant. transport options and logistics, and Roughly one m3 of water is used per consideration of environmental, safety, tonne of coal transported. At the end of social and economic factors specific to its journey, the slurry is placed in storage 30 Coal supply infrastructure tanks, the water removed and the coal but no information on its subsequent used for combustion. development has been found. As China has serious water supply problems, and In the USA there are extensive slurry past attempts to popularize this pipeline systems. Total USA coal-slurry technology appear to have been largely output totaled 91 Mt in 1995, including unsuccessful, further development is not transport by tramway and conveyor. The likely to be pursued. key developmental factor in coal-slurry technology was its cost competitiveness Coal-to-liquid (CTL) when compared to other methods of transporting coal. By the late 1990s, High value, more easily transported pipelines up to 2,400 km were in products than coal can be generated by operation. A plentiful supply of water is converting coal into liquid fuels and required, and in some instances a chemicals. Direct liquefaction exploits benefit of the process can be the about 55 percent of the energy in the transfer of water in addition to coal. This coal and the Fischer-Tropsch process transport method is therefore not about 45 percent. The attraction of these suitable for mining areas with scarce processes is that domestic energy water resources. resources can be used to offset costly In 1994 an international consortium petroleum imports. However, coal is signed an agreement with the itself a limited resource and the cost of Government to build an 800 km, extensive conversion cannot be justified US$889 million, underground coal slurry as an expedient to overcome short-term pipeline in northern China linking Shanxi transport constraints overriding national with the coast of Shandong Province, policy (Box 3.2). Box 3.2 Transportation constraints on development of remote coal resources should not be used to justify coal uses inconsistent with a long-term national strategy for coal. New technologies should only be adopted where they are competitive with existing processes (taking into account social and environmental costs and benefits). Accelerated development of coal mining seems to have started in Xinjiang contrary to the aims of rational and sustainable development and its status as a national strategic reserve to ensure energy security for China. The region's coal production stood at 43 Mt in 2006. Before the end of the decade, two or three mining bases each with an annual output of 50 Mt, along with a number of 10 Mt mines are expected to be built. Xinjiang has a limited local demand for coal but its main market lies some 3,000 km to the east and transport capacity and cost issues have not been adequately addressed. The development in Xinjiang remains behind the rest of China and the province has limited natural resources. Therefore the local government has strong incentives to develop its natural assets. Construction began at the end of April 2007 on what will be the largest coal mine in Xinjiang. Located at Ili in the western part of the region, it will involve a total investment of about 2.6 billion yuan (US$336 million). Construction of the mine will take 42 months, the planned capacity is 10 Mt and the estimated coal resource is about 301 Bt. The colliery is being built and financed by Xinwen Mining Group Corporation, China's eighth largest coal mining group, based in east Shandong Province. The expected annual revenue is 1.45 billion yuan (US$188 million). The Xinwen Mining Group also revealed plans to invest in facilities that will be able to process 30 Mt of coal a year for the production of methanol and olefin in Ili. 31 Coal supply infrastructure Higher world oil prices in recent years US$1400/t (King 2007). Commercial have prompted the development of the viability depends both on low coal prices coal-chemical industry in China to find and achieving production efficiencies to alternatives for petroleum substitutes. contain operating costs, which requires China's methanol production capacity investment in large-scale plants. reached 5.36 Mt by the end of 2005 and it is expected to attain an annual The commercial viability of coal-to-liquid methanol production capacity of 13 Mt (CTL) projects is predicated on by the end of 2008. The NDRC is trying continuing high oil prices. The cartel of to avoid the construction of excessive oil producers could conceivably increase over capacity in case the price of oil supply to depress prices if CTL was drops sharply. It is also discouraging threatening oil markets. This would inefficient, small-scale projects. undermine investments in CTL plants in China. In such a situation, remote Anhui Huainan Chemical Group plans to western areas of China that had become raise its ammonia production by 50 reliant on CTL would suffer in the percent to 300,000 t/yr by 2008 after absence of alternative coal markets. introducing a coal gasification unit. Dow However, at present such a scenario is examining a project with Shenhua seems highly unlikely. Group to convert coals to olefins at Yulin city in Shaanxi Province and Sasol has The Government issued a circular on completed a pre-feasibility study for two regulating the coal-chemical industry in 80,000 bbl/day CTL projects. July 2006, urging local governments to tighten control on new projects. The Rising demand for poly-olefins (eg Government will not approve coal polypropylene and polyethylene) in Asia liquefaction (coal-to-liquids) projects with and a supply deficit, escalating prices of an annual production capacity of less oil and flatter rises in coal prices are all than 3 Mt; coal to methanol or dimethyl acting to drive the CTL market in China. ether (DME) projects of less than 1Mt; The capital costs of coal to olefins plants and coal-to-alkene projects of less than are high at greater than US$5,000/t 0.6 Mt according to a circular released capacity compared with conventional by the NDRC. petrochemical routes at US$900- 3.2 Policy reform needs to enhance performance of the coal supply chain In the past, the needs of the economy for increased coal production over-rode China will need to import increasing considerations of social, safety and tonnages of coal as the cost of domestic environmental costs. Such an approach coal rises and the market will achieve is no longer acceptable to the Chinese the desired balance provided the Government and its people, neither is it Government does not intervene. Key sustainable. Action from government is elements that will soon be in place to needed to remove barriers to the facilitate increased international sea- development of competitive markets, borne imports include deep water including major barriers which inhibit loading ports in exporting countries, external coal supply. increasing vessel sizes and numbers of vessels which will over time result in Government policy is to adjust export reductions in real freight rates, the quotas in response to short-term coal construction of deep water receiving supply surplus or shortages, but a ports in China and adequate internal market system would be more efficient transport capacity to customer's sites. in achieving a balance. 32 Coal supply infrastructure Railway infrastructure is not sufficiently in China, sellers are invariably faced well developed to satisfy coal transport with high transport costs. The demand. Ongoing reforms to introduce determination of rail freight rates is not competition and mobilize finance for transparent, there is no mechanism for expansion will bring market mechanisms coal suppliers to negotiate long-term into play which will lead to increased transportation contracts and the economic efficiencies which should also Government sets minimum coal carriage be reflected in sector performance capacities for the privilege of improvements. Although coal price establishing transport service provisions controls have now been largely removed that should be available to all. 3.3 Recommended policies Market systems naturally find the these areas should be explored in detail supply-demand balance, and policies but production geared to meet local should be introduced to improve the demands in the first instance while the market orientation of the supply chain. Government researches energy transport options as part of a long-term Lack of recognition of the sanctity of strategy for regional development. export contracts is damaging to the Consideration should be given to clean, credibility of China as a coal trading high efficiency power generation for nation and it should not expect any west-to-east transmission and to favors as an importer. The Government hydrogen transport where there are should abolish its current export control existing, or proposed, gas pipelines. policies because these affect the competitiveness of China on world coal The costs and security of supply of coal markets. All China's coal producers and other bulk commodities on which should be free to export to their best the economic growth of China relies, available markets and China's coal depends heavily on the efficacy of the consumers should be allowed to import transport sector and accordingly a from the least cost source. steady growth in capacity must be maintained. Otherwise, China's internal The capacity for producing, stockpiling, coal flows will be constrained. Rail will importing and distributing coal in China remain the primary transport system for must be sufficient to obviate the need to coal in the eastern and central regions of rely on the short-term production of China. The bulk loading and storage small mines. A sustainable mining sector capacities of inland waterway ports must therefore be able to build coal should be enhanced where feasible to production without resorting once again alleviate rail capacity limitations and to a "let the coal flow" policy which provide competition to the railways. allows occasional uncontrolled Private investment is needed to finance expansion of small, polluting, hazardous necessary expansions in rail freight mines. A free market system will capacity, but the Government will have produce the most efficient supply chain to surrender a degree of control of the economics. Government policy should sector if the large sums needed are to be aimed at regulating the process to be attracted. protect employment conditions, worker and public safety, and the environment. China will soon have a port capacity theoretically capable of landing around Remote western areas, including 500 Mt of imports each year. However, Xinjiang, have extensive coal resources sustainable development constraints, for which bulk coal transport to the east transport capacity limitations and by railway is not necessarily the most ultimately limited coal resources in efficient solution. Coal resources in Australia, Indonesia and South Africa 33 Coal supply infrastructure and the competing demands of Japan Mongolia, and not exploit its sole market and Korea, means supply could be tight. position to the detriment of the Therefore, China's coal users need to sustainable development of the negotiate long-term contracts directly Mongolian coal mining sector as this will with coal suppliers. No government weaken long-term supply potential and intervention is necessary for this to take defer development of an important coal place. resource for China. The Government of China should allow CTL conversion may offer a potential free import of coal to provide much- means of adding value to coal mined in needed competition to mainland mines remote areas while oil prices remain forcing them to improve efficiency. Coal high, but proliferation of such plants imports and coal stocks will replace should be carefully controlled by the small mines as a supply buffer. The Government on the basis of strategic Government should issue reliable coal fuel supply needs and national long-term supply and demand statistics and long- energy security. There should be no term projections to signal future needs to policy incentives for constructing and facilitate a measured response from operating coal-chemical conversion or international producers and to prevent CTL plants as this could lead to unexpected surges in demand which excessive investment in these projects escalate prices. involving a misallocation of resources. The market, rather than government China should take a more sensitive subsidies, should determine the approach to its coal development allocation of China's coal resources ambitions with its neighbors, in particular across competing users. 34 Coal supply infrastructure Chapter 4 Restructuring and reform The Government undertook a major holdings. The heavy burden of social campaign as part of the 10th Five Year costs for hospitals, schools, public Plan (2001-2005) to rationalize the security and utilities (5.7 billion yuan in structure of the coal mining industry and 1997) has been largely removed from accelerate modernization. This process KSOCM, transferred to local authority is well advanced and the benefits are ownership and merged with existing apparent in increased economic community services. Consolidation and efficiency, safer operations and transition from inefficient small-scale to improved social conditions for miners. modern mechanized large-scale mining The KSOCM have been transformed shows signs of being effective in into limited liability companies, some of creating safer and more efficient mines, which have diversified ownership though maintaining county revenues, reducing share offerings on domestic and foreign wastage of coal resources, introducing stock exchanges. Nevertheless, the responsible environmental management State, through provincial and regional and promoting local economic and social governments, maintains a strong development (ESMAP 2004). controlling interest through majority 4.1 Current status Coal mines in China are classed as Industry and subsequently passed to large, medium and small based on their provincial government), LSOCM annual productive capacity, respectively (province, city and county-owned) and greater than 0.9 Mtpa, 0.3-0.9 Mtpa, and TVCM (village and local community less than 0.3 Mtpa (Coal Industry Mine owned) no longer accurately reflects the Design Specifications GB50215-2005, 1 nature of ownership, but it is still helpful January 2006). as a general indicator of the effectiveness of structural reform. The The traditional classification of mines for current coal production from the different statistical reporting purposes as KSOCM mine types as conventionally classified (former Central Government managed is summarized in Table 4.1. coal mines under the Ministry of Coal Table 4.1 China coal production from mines of different types Year Total (Bt) KSOCM (Mt) SOCM (Mt) TVCM (Mt) 2001 1.47 618 223 633 2002 1.60 715 267 623 2003 1.78 814 280 686 2004 1.99 939 297 762 2005 2.19 1014 286 890 2006 2.332 1119.57 319.85 892.36 2007 2.523 1229.31 337.52 956.58 2010 2.45 1837 613 (planned) (small mines) Source: 2001-2005 China Coal Transportation and Marketing Association (adjusted for unreported TVCM production using sales data; recent data from SACMS; numbers in parentheses estimated from part-year data. Data in 2006 and 2007 from China Coal Outlook 2008, China Coal Information Insititute 35 Restructuring and reform Ownership of coal mines in China falls China in 2007, while the output of the basically into the following categories: top eight coal enterprises only wholly state-owned and invested coal accounted for about 25.79 percent enterprise, state-owned coal enterprise (Table 4.2) of the total compared with through majority share holding and Australia 46 percent, USA 51 percent, private coal enterprise. Foreign South Africa 87 percent and India 89 companies are permitted to form wholly percent. The reasons for this difference foreign owned coal mining enterprises. are the large amounts of coal produced However, they can only hold minority by small coal mines in China that are shares in joint ventures undertaking the operating to environmental and safety exploration and mining of some special standards that would not be permitted in and scares coal resources. the above countries; the fewer opportunities for low cost, large-scale The scale of operations in China is much opencast mining in China and remnants less than in other major coal mining of central planning which prevent coal countries. The output of the top four coal mines from acting according to enterprises only accounted for about commercial interests. 18.71 percent of the total production of Table 4.2 Coal production by the largest coal mining enterprises in 2007 ROM output/ Comparison Enterprises ROM coal between output (Mt) national total (%) 2007 & 2006 (+/-) Shenhua Group Corporation Limited 235.77 9.34 0.82 China National Coal Group Corporation 105.02 4.16 0.35 Shanxi Coking Coal Group Co. 65.82 2.61 - 0.33 Datong Coalmine Group Co. 65.50 2.60 0.01 Total of four enterprises 472.11 18.71 0.85 Heilongjiang Longmei Mining Group Co. Ltd 54.04 2.14 -0.12 Shaanxi Coal Mining Co. Ltd. 50.26 1.99 0.37 Pingdingshan Coal Group Co. Ltd 37.43 1.48 0.18 Shanxi LU' AN Group Co. Ltd 37.18 1.47 0.15 Total of eight enterprises 651.02 25.79 0.97 Source: China Coal Outlook 2008, March 2008 The Government strategy for raising the few very large enterprises which will production scale of coal mines involves: produce a high proportion of the · The closure of (illegal) small mines; country's coal from areas of prime · Restrictions on the size of permitted reserves using modern mining new coal mines (typically no smaller methods. than 300 ktpa); Whether the latter will produce the · Encouraging the consolidation and desired returns to scale is uncertain as transformation of small mines into the large state-owned groupings may be larger, more efficient industrial-scale too cumbersome, introducing enterprise companies; and diseconomies of scale (e.g. coordination · The aggregation of the major state- cost) that might outweigh production owned coal mining companies into a scale economies. 36 Restructuring and reform The Government is restructuring and Kong, the second largest IPO in the reforming its coal mining sector by: Hong Kong exchange after the China · Life Insurance Company. Corporate restructuring and diversification of ownership, Creating scale allowing public participation through share holding, with the In accordance with government policy, State maintaining majority control large coal enterprises have been of the KSOCM; aggregated into larger, "super-groups" · Strengthening of management such as Shenhua, Datong, Shanxi provisions and resurrection of Coking Coal and China Coal Energy. provincial coal industry The assets, prospects, profitability and management bureaus; liabilities vary greatly from group to · Specifying the minimum coal group. The Government's aim is to seek mining capacity. returns to scale and create inter- provincial rather than intra-provincial Reform of the property rights system competition, as well as international participation through overseas Most of the former large and medium- development. Small mines within the key sized coal enterprises have been coalfield development areas have also transformed into joint-stock companies been aggregated under the groups. by converting debts into shares, introducing strategic investors, or The challenges facing some coal mining through merger and acquisition, groups are immense. For instance, in although the State retains a controlling August 2005, the seven key state-owned interest in all the KSOCM. coal mines in Sichuan province and the Sichuan Provincial Coal Industry Supply At the end of 2003 there were 2,955 and Marketing Company were combined state-owned coal enterprises of which to form the Sichuan Provincial Coal 788 were KSOCM and 2,167 were Industry Group Limited Liability LSOCM. By the end of 2004 these Company (Sichuan Mei Group). The mines had been reformed with 931 proven coal reserves were 13.5 Bt and mines under majority state-ownership. the available reserves were 12.1 Bt in The remaining 2,024 mines were Sichuan Province in 2005. At present, gradually reformed into privately owned, there are 2,200 mines in the province of joint stock and co-operative ventures. which 91 percent are small coal mines (not a big problem, just keep it) This and the proportion of coal output from restructuring was achieved over a short the key coal mines is low. The formation time period demonstrating the strong of the Sichuan Mei Group is likely to commitment of government to reform. improve the performance of the coal While the reforms have facilitated private industry in the province which has been ownership at local level, there are still characterized by small-scale, widely large elements of government ownership distributed mines, poor working and management. conditions, lack of progress in developing key mines, and insecure coal By the end of 2004, 17 coal enterprises supplies. The formation of the group is in China had listed on the Shanghai and also beneficial in focusing talented Shenzhen stock exchanges or on people and technology on improving foreign stock exchanges. Listed coal mine safety conditions, mechanization mining companies included Zhengzhou and modernization, as well as the Coal & Power, Yanzhou Coal, Jinniu rational development and utilization of Energy, Anyuan Share, Guoyang New coal resources. Energy, Shanxi Coking, and Shanghai Energy. In June 2005 the China Large coal enterprises have been Shenhua Energy Limited Liability formed through merger and acquisition. Company, with the Shenhua Group as An example of this process is provided majority equity holder, listed in Hong 37 Restructuring and reform by Shenhua Group's acquisition of a Coal Group (Box 4.1). majority equity holding in the Ningxia Box 4.1 Example of M&A in China's coal mining sector to increase scale On 18 January 2006, the Shenhua Ningxia Coal Group Liability Limited Company was set up as a subsidiary company of the Shenhua Group. The increased scale and access to financing and aggressive management quickened the completion of projects under construction and the planned projects under control of the former Nining Mei Group. These projects were the Yangchangwan, Zaoquan, Meihuajing, Qingshuiying, Hongliu and Maiduoshan mine projects. As a result, the annual production scale of the Shenhua Ningxia (Ningmei) Coal Group will reach 80 Mt in 2008 and over 100 Mt in 2010. The integration of coal and power and coal chemical projects will be accelerated. The Shenhua Ningmei Group Co. legal structure includes a chairman, a general manager and two independent directors on the board. The registered capital of the group company was 10.1 billion yuan, the total available assets amounted to 21.3 billion yuan and the net assets were 12.2 billion yuan. The organizational structure encompasses 67 major production units, including 14 coal mines and 3 coal preparation plants. The Group employs 47,000 staff and workers of which 7,404 are technical staff. The scope of the business mainly involves coal mining, coal washing and processing, coal export, mine construction, machinery manufacture, power generation, metallurgy, chemicals, construction, and building materials. State-owned coal mine investment of the total while 65 percent was in the The investment pattern in the State- form of a bank loan. owned coal mining sector has changed significantly over the years. In the The Government is planning to increase period from the 1st Five Year Plan to the its level of investment in the KSOCM to 5th Five Year Plan, State investment accelerate construction of new mines to accounted for between 85 percent and strengthen coal bases. While 97 percent of the total investment in the administrative intervention by the coal mining industry. During the 9th Five Government in KSOCM has been Year Plan, State investment had fallen gradually reduced, the links are still to 13 percent of the total. Now, finance strong. In 2004 and 2005, the is mainly raised from internal funds and Government issued 3.9 billion yuan of bank loans with state investment government bonds to support accounting for a minor proportion. exploration and coal mine construction Enterprises have built internal cash in the areas designated as large coal reserves from asset sales and operating bases. Construction was planned to profits. expand coal production capacity and to replace that of closed small coal mines. For example, of the total investment in the Zaoquan coal mine project of the Financing structures typical of large, Shenhua Ningmei Group, State State-owned coal enterprises is shown investment amounted to only 7 percent, in Box 4.2. internal funds accounted for 28 percent Box 4.2 38 Restructuring and reform The Shanxi Coking Coal Group, founded in October 2001, provides an example of the ownership and financing structure of the large coal mining enterprises. A state-owned holding coal enterprise with seven subsidiary companies, the Shanxi Coking Coal Group was the first large group in the coal industry to introduce a closely related `parent and son' system connected by investment. By the end of 2005, the total assets of the Group were 42 billion yuan. The major financing modes of the Group include: 1. Bank loan. In April 2006, the Shanxi Group signed an overall cooperative agreement totaling 20 billion yuan with the Shanxi Provincial branch of the Bank of China. 2. Stock exchange listing. The listing of Xishan Coal & Power Ltd (a subsidiary of the Group) stocks raised 1.869 billion yuan, the highest on record at any one time for a Shanxi enterprise. 3. Financing through equity participation. The Group has established strategic partnerships though medium and long-term mutual equity participation with 30 large companies at home and abroad. These companies include Ruhr Kohle in Germany, the Nippon Steel Corporation, (of Japan), Pohang in Korea, and Baoshan Steel, Anshan Steel, Capital Steel, Wuhan Steel and Huaneng in China. services to the industry and provide Construction plan for large coal innovative financial products to support bases coal development construction projects which comply with national policy. The State Council issued Guo Fa [2005] Document No.18 "Some Opinions of the The Government plans to develop 13 State Council on Promoting Healthy key, large-scale coal bases before 2020 Development of the Coal Sector" (June to meet China's projected coal demand 2005) proposed the development of coal (Table 4.3). This is an important resources and the building of large coal strategic action that demonstrates that bases (areas of concentrated and government thinking extends beyond integrated mine infrastructure five-year planning periods. The development) in coalfields with favorable economic effectiveness of this plan will resource (and market) conditions. These depend on the role the Government coalfields are mainly located in adopts. It should limit its activities to an Shandong, north Shaanxi, and mid- enabling and permitting role, setting and Shanxi. The State Council also enforcing standards, leaving the market requested that state-owned and to determine operational performance. commercial banks improve their financial Table 4.3 The thirteen Large Coal Bases identified for development by the Government Coal base Proven Details coal resources (Bt) 1. Shaanxi and 136 The Shandong base is a trans-provincial coal complex Inner Mongolia including several mining areas in Inner Mongolia and Shaanxi. The coal is high quality steam coal suitable for chemical and metallurgical applications. The Shenhua Group is mainly responsible for the development of this coal base. 39 Restructuring and reform Coal base Proven Details coal resources (Bt) 2. North Shaanxi 60 The northern Shaanxi coal base lies mainly in the Yulin and Yan'an areas in the north of Shaanxi Province 3. Shaanxi and 22 This coal base is located on the boundary of Shaanxi Gansu and Gansu Provinces. The coal is of good quality and can be either transported to eastern China and the central south regions, or to Sichuan Province and the Chongqing municipality. It is an important base for steam coal and for the coal chemical industry that the Government views as pivotal in balancing the supply and demand for coal between these regions. 4. Jinbei 75 The Jinbei coal base is located in the northern part of Shanxi province. The area mainly produces steam coal and has good prospects for expansion into a super-large coal-producing complex. 5. Jinzhong 52 The Jinzhong coal base is situated in the central west part of Shanxi Province. The notable Hedong coalfield located east of the Yellow River and west of the Liuliangshan mountains is an area identified for large scale exploitation. 6. Jindong 77 The Jindong coal base is located in the south eastern part of Shanxi Province. The area has the potential to be developed into an extensive coal base of superior anthracite and steam coal. 7. Luxi 23 Located in the western part of Shandong Province this coal base includes the Juye mining area with available reserves of almost 6Bt, a prime area for development. 8. Lianghuai 30 The Lianghuai coal base is a trans-provincial base, straddling the northern part of Anhui Province and eastern part of Henan Province. 9. Jizhong 16 Located in Hebei Province, the heavily worked area has good rail transport facilities. About 90% of the available coal reserves are in the Jizhong coal basin with the remainder in Weixian. 10. Yuxi 20 The Yuxi coal base is located in central Henan and west of the Jing-Guang (Beijing-Guangzhou) railway. The area has rich coal reserves, a wide range of coal ranks and is well served by rail transport. 11. Southwest 46 The Southwest coal base is an inter-provincial base, extending across western Guizhou and eastern Yunnan. This is a key western coal mining area. Although developed in some parts, there are still virgin coalfields in northwest Guizhou, south of Panxian, and east of Yunnan remaining to be explored and developed. It has some promise as a large coal- producing complex. It is considered a potentially important electricity and coal base for the southern route of the "West-East Electricity Transmission" project. 40 Restructuring and reform Coal base Proven Details coal resources (Bt) 12. Northeast 63 The Northeast coal base includes all the major mining areas in the provinces of Liaoning, Jilin and Heilongjiang, and also some mining areas in eastern Inner Mongolia. 13. Ningdong 27 The Ningdong coal base is situated in the eastern part of the Ningxia Hui Autonomous Region. The coal is mainly of non-coking coal, part coking coal and coking coal in rank. Source: China Coal Outlook 2004, CCII The 13 large coal bases encompass 98 resource wastage and improve safety. mining areas with total coal reserves in By the end of 2004 there were more excess of 850 Bt. The total coal output than 25,000 coal mines of various from these mining areas was 1.8 Bt in categories. The productive capacity of 2005, representing 82 percent of the many mines was less than 30,000 tpa. national output, and is expected to reach The problems associated with low levels 2.1 Bt in 2010 which will represent 72 of concentration of production were not percent of the expected demand. The being fundamentally addressed at that Government will provide funds for time. preliminary exploration of coal resources and for the necessary detailed In the 11th Five Year Plan for Coal the geological exploration to delineate the Government switched the priority from extent of the coal bases. According to placing coal production before resource the NDRC plan, large coal enterprises protection, to increasing efficiency of will lead the development of the resource exploitation. specified coal areas. They will be encouraged to attract foreign investment In April 2006, 11 departments, including through joint venture and to participate the SAWS, the NDRC and the MOF, in the consolidation and transformation jointly issued An Jian Zong Meikuang of small and medium coal mines. No [2006] No. 48 Document, namely, coal resource in the bases will be "Some opinions on promotion of work allocated to small coal mines. Any safety and standardization of coal (legal) small coalmines that overlap the resources aggregation" which proposed proposed development of a large coal the following actions: mine will be closed and the owners compensated. All illegal small coal 1. Closing mines that were illegal, mines and those not compliant with unsafe and wasting resources; resource protection will be permanently closed ­ presumably without 2. Phasing out obsolete production compensation. capacity; 3. Upgrading mine safety Consolidation of resources, merger conditions and introducing safer and acquisition of small mines mining methods; Consolidation of mining operations 4. Reducing the number of small under the dominant KSOCM in major mines and increasing the size of coalfield areas is bringing many small, a single mine to meet the agreed private mines under the management of minimum level of 90 ktpa in the KSOCM. In fact, the KSOCM may be southwest and mid-southern part owners through substantial share China, and 150 kt in other holdings in them. This activity is pivotal regions; to the Government's strategy to reduce 41 Restructuring and reform 5. To develop mines rationally and 4. Promoting the principle of protect coal resources. absorbing SCM through merger and acquisition into the All activities must be in conformity with management structure of the the approved general plan of the mine dominant, large coal mining areas, while the scheme for an enterprise. allocation of mining rights and the recovery rate must satisfy the related Aggregation of coal resources can only stipulations of the Government. A target be carried out by one legal person entity, is to eliminate mines with a production suitably qualified, with the necessary capacity of less than 30,000 tpa. finance, with advanced technology and knowledge. After aggregation, the mine The detailed procedures were to be must have only one integrated carried out sequentially by local production system and adopt advanced government in accordance with a plan mining technology and equipment. The approved by provincial government production capacity of the mine after which involves: consolidation should meet the relevant 1. Identifying mines which do not stipulations of the Government and the meet legal, safety and capacity resources (reserves) shall be compatible criteria; with the production scale and mine service life. The consolidation process 2. Revoking all licenses and must be treated as a construction project disconnecting the electricity and all the relevant formalities of mining supply; rights transfer, review and approval 3. Ensuring legal SCM participate procedures should be followed. in the resource consolidation; Examples are shown in Box 4.3. Box 4.3 Examples of consolidation and transformation of small mines by large coal enterprises The reform of the Shaping mine area in Hequ County in Shanxi Province jointly by the Shenhua Group and the Shanxi Province Coal Transport and Marketing Company provides one example of consolidation. In 2005 these two organizations founded the Jinshen Energy Co and jointly invested 850 million yuan for consolidating nine small coal mines and replacing them with a 2.4 Mt per annum capacity mine to enter production in the third quarter of 2006 as a first stage. The area of the Shaping coalfield after consolidation covers 20.8km2 with industrial coal reserves of around 600 Mt and an anticipated, albeit seemingly ambitious, recovery rate of 70 percent to 80 percent. There is an associated coal washing plant with an annual handling capacity of 5 Mt and a dedicated 11 km railway line for the mine area. A further example is the consolidation of 90 small mines in the Pingsuo mining area by the China Coal Energy Group under the auspices of the Antaibao and Anjialing mines in 2006, which resulted in formation of three large-sized surface mines and 14 deep mines. The reformed Pinsuo coal base has an annual capacity of 100 Mt. The Anjialing coal mine project, the first of its type in China, will combine surface and underground mining methods. The actual productive capacity of the mine will reach 30 Mt. The recovery rate of coal from the surface mine will be over 95% and that of the underground mines is expected to be 75 percent to 85 percent. An anticipated 200 Mt of resources will be saved by this process. When resource consolidation reform control of a single entity. There are completed, the exploitation of each 5,345 mining areas with verified mining area will then be under the reserves nationwide, but the number of 42 Restructuring and reform mining operators currently totals 13,227 and some areas are exploited by several The process of aggregating the coal enterprises, often leading to pernicious resources of small mines and competition, over-capacity mining, all too consolidating and merging them with frequent accidents, inefficient use of large mining operations will allow the resources and damage to the large enterprises to determine environment such as subsidence for production and resource recovery rates which no compensation is paid. Areas and to impose their higher safety and failing to complete the process of environmental protection standards. This integration in time will be inspected and is a very positive reform step. closed off to prospecting and mining franchises. Table 4.4 Results of consolidation of small mines under KSOCM in Henan province Provincial statistic 2003 Present No. mines under the 7 KSOCM 58 82 Proven coal resources (Bt) 7.9 11.6 ROM output (Mt) 69.8 86.6 Final production capacity (Mt) - 100 No. of SCM 1569 592 Min. capacity of remaining SCM - 150,000 Overall fatalities/Mt mined 2.6 0.87 (2007) Progress with policy implementation Coal and Power as the entity and an The process of aggregation of resources anthracite group with the Jincheng and and closure of small mines is being Yangquan mines as the core. The actively led by the governments of the Datong Coal Group combined small coal major coal producing provinces with mining enterprises that produced some measure of success as shown in thermal coal north of Taiyuan city, the following examples: increasing the production capacity from 30 Mt in 2003 to 58 Mt in 2005. The Henan: The improvement in resource production capacity of the Shanxi base, safety and output achieved in Coking Coal Group rose from less than Henan, shown in Table 4.4, exemplifies 30 Mt to 50 Mt through aggregation. the benefits of the resource aggregation and consolidation process. As a result of In February 2006, the Shanxi this process, resource recovery is Government enacted the legislation expected to improve by 10 percent, "Procedures for aggregation and use of increasing the potentially recoverable coal resources with compensation in coal by over 200 Mt. The fatality rate per Shanxi Province". It stipulated that the Mt of raw coal in the Pingdingshan merger of minefields of more than two municipality, previously afflicted by many mines, or the merger of the remaining accidents, fell to 0.26 in 2005, placing it reserves of the eliminated mines should among the best performers in China. be based on the mines remaining for transformation (to larger-scale, modern Shanxi: Consolidation and mines). Coal mines in major coal- transformation of coal mines to form producing counties with an annual modern, large-scale, efficient groupings production less than 300,000 tons are is well advanced in Shanxi. Three large not permitted to acquire and merge the super-group coal enterprises, were closed mines. For the aggregation of initiated as planned by Shanxi Province. resources in an administrative region at These groups are a steam coal group county government level, the newly- with the Datong Mine as the entity, added area should not exceed 10 Shanxi Coking Coal Group with Xishan percent of the total occupied area before 43 Restructuring and reform aggregation, and the newly added constitutes illegality is wide, varying from capacity should not exceed 10 percent an administrative licensing error to of the capacity before aggregation. Coal serious safety defects. mines after aggregation must meet the requirements of work safety. The above Based on the No.68 circulation 2001 restricts the power of local government issued by the General Office of the State to allowing only small changes, ensuring Council, all the coal enterprises must that major re-structuring decisions are have the following licenses: mining, coal made at provincial level. production, work safety, coal business qualification and business. A mine is Inner Mongolia: Under the plan for the deemed illegal if any one of these aggregation of coal resources in the licenses is not extant. According to a Autonomous Region of Inner Mongolia, survey conducted for this study, some the number of mines will be reduced TVCM receive as many as 1000 from currently near 1,000 to less than documents each year and failure to 200 within the next ten years. The respond to any one of these could be Government of the Autonomous Region interpreted as non-legal compliance of of Inner Mongolia issued the regulation the mining operation. A combination of "Enforcement regulations (for trial) of the inefficient government administration People's Government of the and the number of certificates with short- Autonomous Region of Inner Mongolia term applicability required by enterprises for promotion further of aggregation and exacerbates the risk of non-compliance use of coal resources with to small mines. compensation". It specified that by 2010 the total number of coal mines will be Each coal mining province has identified 500 or less of which no more than 200 its closure targets. In North Shaanxi, will have an annual production of less mines with less than 60 kt capacity will than 450 kt. Small mines with an annual be closed, less than 10 kt capacity in output less than 300 kt will be closed. South Shaanxi and less than 30kt capacity elsewhere. By the end of 2008, Small mine closure planning small mines with capacities less then 90 The Government plans to close 4,861 ktpa will be closed in Shandong. small mines from 2007 to mid-2008 leaving a total of around 10,000. The By the first quarter of 2006 there were aim is to close illegal mines and those 23,000 coal mines nationwide of which which do not comply with the minimum small coal mines accounted for 86 production capacity set arbitrarily by percent in number, but about 38 percent government. The spectrum of what of production capacity (Table 4.5). Table 4.5 Coal industry structure Q1 2006 Average Type of Production Production production coal mine Number capacity capacity of a (Mt/a) capacity % of total single shaft (Mt/a) KSOCM 879 1198 44 1.36 LSOCM 2,379 499 18 0.21 TVCM 19,818 1057 38 0.05 Total 23,076 2,754 100 0.12(average of whole) There is still substantial coal production reported closures (Table 4.5). Much of from small mines despite the many this output is presumably from merged 44 Restructuring and reform and consolidated small mines that Progress in closing small, inefficient should have upgraded their working mines is being hindered by local methods and equipment, and also from authorities that are delaying closures to new modern private mines. If the reduce the economic and social impact. reported closure statistics are correct Some officials continue to retain then substantial new mine construction financial interests, despite government must be taking place. Cases of over- policy requiring divestment. Closure production sanctioned by local plans are therefore being continually government officials have been cited revised. which also cast doubt on the statistics. For example, mines with a design The success of planned closures (Table capacity of 50,000 tpa have been 4.6) will ultimately be judged by certified to produce 150,000 tpa by government on the basis of coal output corrupt officials (Xinhua, China Daily, 30 attributable to small and local mines. November 2006). Shanxi Provincial The whole process is clouded however, Government and SAWS introduced a by incomplete reporting of coal regulation in 2006 to limit the number of production. While this can be estimated miners to 100 per shift in an attempt to by back calculation from total sales, an control the problem of over-production. illegal coal market will obscure this data. Table 4.6 Planned small mine closures Year Planned. closures No. remaining at year Estimated TVCM coal during year end output in the year (Mt) 2001 12,257 na 633 2002 3,151 25,343 623 2003 No significant na 686 2004 progress na 762 2005 5,001 19,826 890 2006 2,652 17,176 na 2007 2,209 14,967 na 2008-2010 4,967 10,000 700 Sources: SACMS, China Coal Transportation and Marketing Association The NDRC issued its national coal and CBM exploration and exploitation, industry policy in November 2007, the and reaffirms the suspension of core of which is focused on reducing the approvals for small-scale coal projects. contribution of small-scale coal mining to The policy states that no coal production national coal production (Jing Yang, 29 project with an annual production Nov 2007, Interfax-China). The new capacity of less than 300 kt (0.3 Mt) will policy, which represents the first mid to be approved for development before long-term plan for China's coal industry 2010. raises entry requirements for coal mine Table 4.7 Region specific minimum annual production capacity Province/region Minimum annual production capacity (Mt) Shanxi and Shaanxi and Inner Mongolia 1.2 Shandong 0.45 Sichuan, Guizhou, Yunnan and Chongqing Municipality 0.15 Fujian, Jiangxu, Hubei, Hunan and Guangxi Zhuang 0.09 45 Restructuring and reform Region-specific minimum annual reappear when local supplies are unable production benchmarks that take into to meet demand. There will be no safety account regional coal reserves (Table inspections and no social protection for 4.7) are set out in the policy. The the workers at these illegal mines. implication of the 0.3 Mt threshold is that no small mine coal mine projects outside Illegal small-scale mining Shanxi, Shaanxi and Inner Mongolia will The tally of illegal activities recorded be approved before the end of the from 2001 to September 2006 is shown decade. in Table 4.8. Shanxi Province, the country's largest coal producer, closed The policy supports government efforts 3,550 illegal coal mines in 2006 and to phase out small-scale mines. since the start of resource reform has However, as the measures disregard reduced the number of its small coal local social and economic factors, it is mines by 30 percent. quite likely that illegal mines will Table 4.8 Illegal coal mining activities 2001- September 2006 Non compliant activity Number of cases Penalties for operating unlicensed mines 168,506 Lease boundary transgressions 12,500 Illegal transfer of mining right 3,033 Exploration licenses revoked 92 Mining licenses revoked 6021 Source: CCN, 27 October 2006. A resource consolidation policy has Scant data exists regarding the enabled large mines to subsume continuing extent of illegal coal mining. reserves of small mines and maximize Eradication will be difficult in remote the opportunities for the application of mountain regions where the economic modern, efficient and safe high- survival of communities depends on production mining techniques. However, local small coal mines of a size below reserves in some coalfield areas are the minimum capacity set by virtually exhausted, while others have government. Data on many of these scattered resources with difficult geology mines may not even enter the statistics. and mining conditions. The latter However, exclusion of such mines from conditions are only suitable for small- the coal industry administrative system scale mining and the policy is to is not desirable as mine management's modernize and aggregate SCMs into awareness of good mining, safety and larger units and to maintain production environmental practices will remain low. at current levels. This policy is necessary as cessation of production Local governments have offered would result in increased transport compensation after closing legal coal capacity requirements on an already mines, but no compensation for illegal saturated rail network to import the coal ones. According to a case study of small from other provinces. Reserves of low mine closures in Qinshui County in rank, low heat value coals are to be Jincheng city, three legal coal mines mined and used for power generation at were closed in 2003, with each receiving the mine site to relieve coal transport 300,000 yuan compensation. After 2006, pressure. This would also occur due to no compensation from government was their relatively low economic value which offered to any of the closed small coal makes long-distance transport mines in Shanxi, as the compensation uneconomical. The general policies should be determined and financed by applied to different coalfield areas are merger. illustrated in Table 4.9. Coalfield development policies 46 Restructuring and reform Table 4.9 Coalfield development strategies General Coal Province Situation Policy Region Liaoning, Jilin Close all SCM in Beijing by and Hebei, Reserves declining. 2010 due to exhaustion of (Beijing) reserves. Stabilize production elsewhere. Heilongjiang Coking coal reserves. Limited increase in production. Shandong Reserves declining. Stabilize production. Henan Substantial reserves. Maintain production scale and upgrade SCMs. Anhui Scope for large and medium scale mines. Increase production. Eastern E Inner Lignite reserves with scope Construct integrated mines Mongolia for large and medium scale and mine-mouth power mines. plants. Zhejiang Reserves approaching Close mines as they become exhaustion. exhausted. Scattered resources, thin SCMs to be upgraded to Jiangxi, Fujian seams and difficult mining maintain production and conditions. reduce pressure on inter- provincial rail transport. SCMs to be upgraded to Hunan, Hubei Resources dispersed with maintain production and and Guangxi thin seams and poor mining conditions. reduce pressure on inter- provincial rail transport. Geological conditions are Prime areas for resource favorable to the consolidation, for the construction of modern, absorption of small mines by Shanxi, Inner high production coal mines. the large mining enterprises Central Mongolia, Includes eight large mining and for exploration and Shaanxi and areas: Shendong, expansion of production Ningxia Shaanbei, Huanglong, capacity. New mines of less Jinbei, Jinzhong, Jindong, than 0.3Mt prohibited Mengdong (Inner Mongolia (0.9Mtpa minimum if thick part) and Ningdong. seams). Construction of large and Enhanced exploration of medium-sized coal mines in Western Guizhou, substantial resources combination with Yunnan needed to identify workable consolidation and reserves. transformation of small mines to satisfy local need. Coal resources withTransformation of small Sichuan, development potential in mines to stabilize production Chongqing the Guxu and Junlianscale and reduce pressure mining areas. on coal transport into these areas. 47 Restructuring and reform General Coal Province Situation Policy Region Sufficient coal resources to Coal production is mainly support large and medium- aimed at meeting local Xingjiang, sized mines but they are demand. Efforts to be Gansu and remote from the main coal concentrated on exploration Qinghai consumers. Development and increasing identified potential in the Huating resources and proven coalfield in Gansu. reserves. The Government's policy towards coal projection for 2020 indicates the need development is highly prescriptive. For for an average increase in capacity of example, it specifies the minimum 148 Mt each year. At US$50/t (based capacity for new mines. The problem is on recent mine costs) this will require an that coal deposits differ substantially and average annual capital investment of it may be more economical to mine US$7.4 billion and would be equivalent some deposits at a lesser scale of to the commissioning of, for example, operations. The approach that the 15 new very large mines each with a Government is adopting is not consistent capacity of 10 Mtpa every year. The with a market-oriented approach to the projected investment requirement development of the coal industry. compares proportionally with the US$4.5 Consolidation of coal production under billion per year invested in mining fixed fewer larger enterprises, in some assets between 2001 and 2005 and the instances, may be counter to the approximately 100 Mt expansion of objective of encouraging competition. KSOCM capacity per year during that Where the policy of consolidation should period. In practice, more mines will be produce benefits of scale, the full constructed as not all mining areas will opportunity to improve economic support large mines, and some may fail efficiency will not be realized, unless the due to unforeseen problems. mines are allowed to make subsequent operational decisions on commercial In addition to these new mines, grounds. replacement capacity for exhausted mines must be financed. Further, an In a free market system merger and allowance needs to be made for under- acquisition allows companies to improve capacity performance as mining their economic efficiency while at the difficulties increase, raising the annual same time decisions are determined by investment perhaps by a further 20 market conditions. Due to the percent. complexities of local conditions and the convoluted local government and private The total investment, therefore, from interests in the coal mining industry, 2007 to 2020 in coal mine construction such opportunities are not easily could amount to US$115.4 billion with exercised even where there may be additional funds required to raise the likely benefits. Determined capacity of the coal transport administrative action by central and infrastructure commensurately. In a provincial government has therefore wholly competitive environment the been essential to overcome these local actual build program would depend on problems and force the restructuring coal production costs and delivered pace. prices compared with imported coal. Financing coal industry restructuring At present there are substantial and expansion domestic financing resources available Interpolating between actual coal to the coal mining sector from share production in 2006 and the World Bank markets and state banks. The 48 Restructuring and reform Government has expressed a desire to has therefore sought to expand its attract FDI, mainly motivated by a policy reserves base through acquisition, aim of introducing advanced foreign consolidation and transformation of technology. Likely conditions for FDI clusters of small mines in new mining would be foreign majority ownership and areas. the introduction of modern safety management systems. As there is little It will be a major challenge for the prospect of the acceptance either of Shenhua Group to accomplish such a foreign management of coal mines or rapid expansion without significant majority ownership, such investment is damage to the environment, not only not likely to be forthcoming. At present a from the mining activities but also from joint venture (with less than 50 percent the continuous massive infrastructure ownership) is the only vehicle for expansion for coal transport. Shenhua involvement in coal mining, other than has received a best enterprise award for by share holding on the stock market. its current environmental protection International mining companies are performance but whether this good discouraged from investment in China's practice can be maintained at four times coal mining by the absence of fair the current rate of expansion is competition due to uneven enforcement uncertain. The Shenhua Group has ably of safety and environmental legislation, demonstrated what can be achieved the paucity of identified available where geological and mining conditions commercial reserves, and uncertainty in are favorable. The coalfields in the tenure of title, and data inaccessibility. northern and eastern parts of China are generally less geologically complex than The limited degree of any foreign control those to the south and are therefore permitted by the Government would easier to mine and higher capacity probably ensure no significant outputs can be sustained. The Shenhua competition was developed with the model is therefore not replicable across large domestic mines. This would be China. acceptable, provided domestic mining companies were free to compete with The coal mining industry has been each other and there was competition struggling to keep pace with increasing between domestic coal, imported coal demand. Out of five mines of various and other fuel sources. scale examined for this study (2003 data), four were producing at between Strategic planning of coal 113 - 133 percent of capacity and the exploitation other at 96 percent. The Government China's coal industry has demonstrated has expressed concern about the safety an ability to expand coal exploitation at a hazards of over-capacity production, but prodigious rate. In 2005, the China the practice still continues to some Shenhua Energy Co. produced more extent and many mines are working at than 121 Mt of coal, an increase of 20 maximum capacity due to the strong Mt over the previous year. On its existing coal price. Comparison of KSOCM achievements, the company's goal of capacity and KSOCM output in 2006 800 Mt by 2020 would require 60 Mtpa (Tables 4.2 and 4.5) suggest the mines expansion each year for 10 years. In were working at 105 percent of capacity comparison, the average annual on average (or at full capacity making expansion rate achieved by all KSOCM allowance for statistical error). from 2000 to 2004 was 100 Mtpa. Increases in coal production are not In 2005, Shenhua Group's marketable matching increases in coal-fired power coal reserves were 5.74 Bt, so at generation capacity. Chinese raw coal planned future rates of production, the output rose from 2.19 Bt in 2005 to 2.33 reserves of its existing mining areas will Bt in 2006, an increase of 6 percent. be exhausted by 2019. The company However, in the same year China's total 49 Restructuring and reform coal-fired power generating capacity blast longwalls. In Shanxi Province, 20 rose by nearly 24 percent, or about 484 percent of state-owned mines use drill GW. and blast longwall methods. Many fully mechanized faces in China use last- The existence of proven reserves does generation mining technology and locally not necessarily mean that all coal can be manufactured Chinese equipment, extracted at the desired rates. As mines which is much lower in price than work deeper reserves, the coal seam imported western equipment, but gas content will tend to increase and sometimes less reliable. output from the gassiest mines will be constrained and production costs Recently introduced safety regulations increased. While methane drainage that limit the number of underground systems have been installed in virtually workers per shift to 100 is aimed at all medium and large gassy mines, the forcing mines to automate, as the efficiency of drainage capture systems in alternative is a reduced output if many mines is poor. Moreover, in some manually intensive mining methods are mines coal production is allowed to used. continue when methane concentrations exceed the permitted limit Mechanization becomes more of an issue in respect of thin seam mining due More rigorous enforcement of safety to the possibility of conflict between regulations, combined with increasingly resource recovery requirements and difficult mining conditions due to gas, economic efficiency. Enforced could mean that by 2020 actual mechanization of thin seam working production is only 90 percent of mine could reduce the economically mineable capacity for the coal industry as a whole reserves, increase mining costs and (estimated by assuming half the mines reduce the amount of recoverable coal are gassy or in difficult mining conditions compared with the current situation in and that coal production in 20 percent of which more versatile, but more labor these mines is constrained by gas or intensive and hazardous, semi- other geological factors). mechanized methods are used in geologically challenging mining areas. Choice of exploitation method Government policy encourages the use Seams of thermal coal as thin as 0.8m in of longwall mining methods to ensure horizontal and gently dipping deposits maximum recovery of coal resources. All are considered workable in China and but the most backward small mines now western observers consulted during this probably practice some form of longwall study have expressed concern at the mining, although a substantial proportion hazards of low working heights. are only semi-mechanized. Semi- Underground mines in western countries mechanized methods involve drilling and typically work seams of no less than 1.5- blasting the coalface, manual setting of 2.0 m thickness as modern, highly supports and manually getting the productive longwall face systems can broken coal onto a conveyor. The typically operate to a minimum of 1.5 m. method is therefore labor intensive and has low productivity. In response to market demand from coal mines, Chinese manufacturers have The Government is taking positive steps made significant technology advances in to fully mechanize coal mining mechanized thin seam mining. For operations to concentrate coal example, JNEG Xingtai Mining Industry production on fewer coalfaces, to reduce Group manufactures longwall coalface the number of miners at risk and to equipment suitable for 1.0 to 1.9m improve mine safety. Fully mechanized height extraction at 700t/h. The longwalls are capital intensive and less Zaozhuang Mining Group Corporation, flexible than the "conventional" drill and Shandong, has developed thin seam 50 Restructuring and reform roof support systems that have enabled face achieved 600 ktpa but production up to a fourfold increase in the could be limited by coal panel production rate from 0.5 - 0.8 m seams development rates rather than the and enhanced safety with the best longwall technology. monthly production reaching 104,000t. Innovations in the Chongqing On balance, overall safety is likely to municipality have facilitated improve as a consequence of the efforts mechanization of seams down to 0.4 m to fully mechanize thin seam extraction. in thickness, below the standard The performance of modern plough minimum of 0.8 m. However, no details equipment imported from Germany on the costs, output or working shows that improved extraction conditions are available. efficiency and operating cost reductions, which are high on the agenda of coal The ability to mine thin seams efficiently mining enterprises, are achievable in is important to the Tiemei Group in certain geological conditions. The above Liaoning Province. This mining developments illustrate that given an enterprise has proven reserves of 2.3 Bt, appropriate incentive, mining companies just over one third of the province's total, will seek to find a technical solution to of which thin seams constitute 26 optimize extraction performance. The percent of the coal. Production from current driving incentive is not the these thin seams was low at around 100 resource recovery standards, but the ktpa due to the difficulties in mining price of coal. using conventional drill and blast methods, until a mechanized solution Improving mining efficiency and was found. An automated plough system reducing costs combining core German technology (38 million yuan) with domestic coalface Mining costs will increase as mines start equipment costing a total of 600 million to operate to similar safety and yuan (one-third the cost of an imported environmental standards as those in full coalface system) was installed in developed countries. Power Xiaoqing mine of Teimei Group and put consumption at individual mines will also into trial production on January 5, 2006. increase with more degree of It produced 215,900t of coal in 63 mechanization and with an increase in working days, an average rate of coal production capacity which will come 3,427t/day. The best daily production predominantly from modern, fully achieved was 4,750t. The annual rate of mechanized longwalls. To remain production under the new system of 1.5 competitive, efforts must be made to Mt is anticipated to increase to 2 Mtpa if match increased costs with higher the underground coal transport system mining efficiencies. Energy efficient is upgraded. An investment payback mines should be a goal and policies time of less than one year is possible. should be put in place to encourage investment in energy saving technology There are two fully mechanized thin and practices which will not lead to any seam longwalls, 1.3 - 1.6 m, in Shanxi, compromise either in safety or any mined using German plough technology. reduction in the sophistication of However, this equipment is costly and mechanization of coal extraction. unlikely to be used widely. Its application is also limited by the physical Mine design rules are still out-dated, characteristics of the coal seams. A relying on a formulaic approach which package comprising a German- inevitably leads to inefficiencies in manufactured plough, control system mining operations. New design rules and conveyor with Chinese supports for have been forming for a number of years a 150 m face, together with a road- and in 2005 State Council requested header was reported as costing 100 that the revision be accelerated. million yuan. Output from one longwall 51 Restructuring and reform Reluctance by some foreign companies practiced and current government efforts to import their most up-to-date and to enforce IPR are having little impact in efficient mining technologies into China the coal mining sector. This process also is denying China's coal mines access to hinders development of competition technologies that could help to improve which is needed to drive domestic both the safety and efficiency of coal manufacturers to invest in R&D and mining operations. Unlicensed copying improve product quality and of mining equipment is blatantly performance. 4.2 Sector structural reform needs Coal industry restructuring to raise the of enforced mine closure. As a scale of coal mining enterprises is well consequence, closure of hazardous, advanced but the problem of small coal polluting small mines is proving mine closures remain problematic. Government policy requires that legal mines which are below the As long as national concern about minimum capacity criteria are inadequate coal supply persists and compensated on closure, but these prices remain strong, small mine payments are not always made. closures are difficult to enforce (and there are strong incentives for operators Some of the small coal mines may be to evade the closures). In many coalfield continuing operations under the guise of areas, local governments are highly aggregated units that nominally meet dependent on small mines for tax government conditions for the minimum revenue and are therefore reluctant to scale of permitted capacity. Shanxi, one close them. Closure also causes serious of the major coal mining provinces, had unemployment among manual workers, planned to complete the closure of all results in loss of residual coal in heavily mines with a capacity of less than 90 worked areas, removes a low cost ktpa in 2005 but did not meet the goal. source of energy from isolated towns Furthermore, nearly 60 percent of the and villages, leaves environmental 5,001 SCM closures across China problems untreated and creates public ordered by the Government in 2005 safety hazards after abandonment. Until were still operating in January 2006 policies are devised and implemented to (Zhao Tiechui, SACMS, 4 September solve the economic and social issues 2006). Despite government policy, the arising from small mine closure, unsafe owners of small coal mines are not illegal mining operations will continue. receiving compensation for the loss of resources and income when their mines Due to a lack of alternative opportunities are closed. Neither, apparently, do for workers and owners of small mines willing participants automatically receive that have been closed, these mines are shares in the consolidated company. often re-opened illegally. Owners of Due to the complex licensing regime for small mines in general see little point in coal mines, it is very difficult for small investing in modern mining technology, coal mines to keep all the necessary long-term mine planning and safety documents up to date and it is possible equipment to comply with current that compensation could be withheld on regulations as all can be lost in the event grounds that a mine is technically illegal. 4.3 Recommended policy reforms The Government should continue its production units under the control of the current policy of resource consolidation large coal mining enterprises in the and transformation of mines into major coal base development areas. modern, mechanized, efficient high- 52 Restructuring and reform Small mine consolidation at local level is prescription. The prescriptive minimum increasing the scale of domestic private mine production capacity should sector participation in the coal mining therefore be revoked. Instead, specific sector. Some large operations could small mine operational, safety, social develop from these nuclei to compete and environmental standards which are directly with the administratively reasonable and achievable should be unwieldy KSOCMs. These emerging formulated and implemented. Such an large-scale private companies have less approach would legitimize small mines social liabilities, and they are also likely and allow closure decisions to be made to be more commercially orientated and on commercial grounds. The licensing less susceptible to political interference. system should be streamlined to reduce The emergence of large-scale private administrative burden and the ownership sector coal mines should be encouraged rights clarified so investment can be by allowing them to compete for coal secured. resources with KSOCM. These mines should receive similar levels of Barriers deterring the introduction of government support to KSOCM, but also some modern mining technologies into be regulated with similar rigor. China should be removed. IPR protection for foreign imported mining Property and coal mining rights should equipment and technology should be clarified for legally (according to local therefore be conspicuously enforced and rules) operated small mines with punitive fines imposed on malefactors to guarantees of payment of compensation encourage foreign manufacturers to if closed by administrative order. The expose their most up-to-date Government should provide social technologies, where suitable, to China's protection for the laid-off workers, coal mining sector. including itinerant workers. Underground equipment and electrical The economic and social benefits that safety approval procedures in China properly regulated small mines can (Mei Anquan) should be made provide to isolated communities should compatible with the European systems be recognized and a code of standards to remove the delay to market entry of developed to allow such mining to advanced foreign equipment already continue at a scale determined by the manufactured and tested to local market rather than by government internationally approved levels of safety. 53 Safety, health and community impact Chapter 5 Safety, health and community impact 5.1 Safety of mineworkers Coal mines in China have become safer Work in many of China's coal mines places to work with an absolute remains dangerous despite robust reduction in fatalities by over 40 percent regulations and massive government since 1996 and the fatalities per Mt coal investment. Fatal accidents occur almost mined reduced to a third of the 1996 daily in Chinese mines as safety figure by 2007. This has been achieved regulations are ignored by mine mainly by raising safety standards in managers and workers and because local private and community owned coal production rates often exceed the mines and by increased mechanization capacity of ventilation and methane which has reduced the numbers of control systems. The large difference miners at risk per unit of coal extracted. between coal prices and costs in the small mines attracts unscrupulous Some of the large coal mining operators which, combined with the companies are developing an exemplary complicity of corrupt, local officials, approach, achieving very low fatalities means that profit is pursued with little rates (measured as the number of regard for human health and safety. fatalities per million tonnes of coal Serious cases are prosecuted. For mined), comparable with some example, two mine owners in developed coal mining countries. For Guangdong province were jailed for 11 example, the fatality rate in the coal and 10 years each for a colliery flood mines of Yitai Mining Group, Inner that killed 121 people in August 2005. Mongolia, averaged 0.036 per Mt in 2005 and 2006 compared with 0.018- In November 2006, in response to the 0.040 in the USA over the last ten years increasing fatality rate in Shanxi (Feickert 2007). For the first half of Province, the Provincial Government 2006, the fatality rate of the Shenhua and SAWS imposed a new rule, limiting Group's Shandong Coal Company was to 100 the maximum number of people 0.028, compared with 0.6 for the key allowed underground during any shift in state-owned mines and the national SOCM and TVCM. This was based on average of 2.2, after producing about safety limits to prevent uncontrolled 50Mt of thermal coal. production, with managers exceeding agreed mine capacity. The fact that Xishan Coal and Electricity Company, Shanxi Coking Coal Group, Yu Youjun, Governor of China's coal-rich could produce 30 Mt coal in 2004 from Shanxi Province, apologized on 30 their mines, some of which are gassy, January 2007 for the major coal mine without a fatality after spending around accidents of the previous year (and also US$158 million on safety improvements for the province's failure to fulfill its in the preceding five years, shows that energy-saving target ­ which would the concept of zero fatalities, the only have reduced pressure on coal internationally acceptable target, is production). The Governor stated that an achievable. average of 0.8 miners died for every 1Mt of coal mined in Shanxi in 2006, a In contrast, some large mining groups record better than the national average. have appalling safety records. For Shanxi had also planned to reduce example Fuxin has recently experienced energy cost for per unit of GDP by 5.6 two large scale accidents. 214 miners percent in 2006, but only achieved a 2 were killed in an explosion in February percent decrease. It is not common for 2005 and 27 in June 2006. such a high-ranking official to apologize openly in China and shows a strong 54 Safety, health and community impact commitment and the acceptance of Most of the available data refers to fatal responsibility by government. In fact, accidents. The most serious of these Shanxi Province has made exceptional involved explosions, flooding and falls of progress in improving the safety of ground. While coal mines receive medium and small mine operations. reports of investigations, these take a long time for the relevant government Accident statistics departments, through SAWS and The closing of small, hazardous, SACMS, to complete. However, this is polluting coal mines has resulted in an little different from developed countries overall improvement in safety with the where five years can elapse in some average fatality rate for all types of coal instances before a detailed serious mine in 2006 at an all time low of 2.04 accident investigation report is released. (Figure 5.1) but serious accidents, In China, there is a scarcity of case especially explosions, remain a too study data on serious non fatal frequent occurrence in the KSOCM accidents, their scale and causes, but among which there is a large variation in this is understandable given the priority safety performance. to reduce fatal accidents. .U GBUBMJUJFT Figure 5.1 The trend of average fatality rate in China's coal mines Figure 5.1 shows the long-term average fatality trend for China's coal industry. A closer look at the fatality rates in the Data from the 1950s may be suspect, different types of mine is needed to but the overall trend is one of significant determine the potential for the decline. The steeper decline after 2000 continuation of the downward trend shows the effectiveness of government towards those in developed mining policy and actions in recent years. This countries. is a very positive result. 55 Safety, health and community impact .U FT JUJ UBM 'B "MM .JOFT 'BUBMJUJFT .U ,40$. 40$. 57$. Figure 5.2 Fatality rate trends in coal mines of different type in China Figure 5.2 shows that since 2000, per Mt mined from 1.1 in 2003 to 0.6 in fatality rates have declined rapidly in 2006, an almost 50 percent SOCM and TVCM, and the composite improvement. However, the average rates are approaching that of the fatality rate is still an order of magnitude KSOCM which set the standard for higher than international coal mine China. safety standards. The average figure belies the fact that some large coal The expenditure of 83 billion yuan mining enterprises have world class (US$11 billion) over the last five years, safety records, but the average fatality mainly on safety technology and rate is driven upwards by occasional, but improvements in KSOCM, has resulted very serious, major accidents that cause in a reduction in the average fatality rate many deaths (Table 5.1). Table 5.1 Single accident occurrences causing over 100 deaths from 2000 to 2007 Date Location Types Fatalities 2000.9.27 Muchonggou coal mine, Guizhou Gas and coal 162 Province, Shuicheng Mining Bureau dust explosion 2002.6.22 Chengzihe coal mine, Heilongjiang Gas explosion 124 Province, Jixi Mining Group 2004.10.20 Daping coal mine, Henan Province, Gas explosion 148 Mechanical Group Limited, Zhengzhou 2004.11.28 Chenjiashan coal mine, Shaanxi Province, Gas explosion 166 Tongchuan Mining Group 2005.2.14 Sunjiawan Haizhou coal shaft, Liaoning Gas explosion 214 Province, Fuxin Mining Group 2005.8.7 Daxing coal mine, Guangdong Province, Flooding 123 Xingning City 2005.11.27 Dongfeng coal mine, Heilongjiang Coal dust 171 Province, Qitaihe Mining Group explosion 2005.12.7 Liuguantun coal mine, Hebei Province, Gas explosion 108 56 Safety, health and community impact Tangshan City Kaiping District 2007.12.05 Xinyao coal mine, Shanxi Province, Gas explosion 105 Ruizhiyuan Minging Ltd. Source: United States Mines Rescue Association (USMRA); The State Administration of Work Safety The coal mines which became hiring lawyers to sue the local operational in the 1950s, especially governments. those that did so with assistance from the former Soviet Union in North East This event shows the determination of China such as Fuxin and Jixi, seem government to tackle mine safety issues. particularly prone to serious explosions. However, the closure activity was A possible contributory factor is initiated as a knee-jerk reaction to a equipment obsolescence. Worn out or major accident when it should have poorly maintained electrical equipment been managed through mine inspections increases gas ignition risk. as a preventative measure. In addition, social programs to generate alternative Statistics must be interpreted with employment are an essential component caution. While official statistics show a that is currently missing from the small significant decline in fatality rates in mine closure process. small mines, not all accidents in small coal mines are reported due to concerns It is likely that small mining operations in about closure by the owners. Local some remote areas can be justified communities are often also concerned economically. It is therefore about losing a source of employment unreasonable to impose a blanket ban and therefore tend to support the mine on small mines based on an arbitrary owners irrespective of the poor and minimum capacity. The effect of a unsafe working conditions faced by the prescriptive ban is to push many small miners. There is also uncertainty on coal mines, which will continue to operate for production quantities attributable to local economic and social reasons, small mines as some illegally mined coal outside the safety inspection regime. may not pass through official sales Mine owners will not risk investment in channels. However, on balance it seems safe, modern equipment as they are reasonable to accept the trend data. unlikely to be compensated if the mine is destroyed. Neither will the miners Local governments show determination receive any social protection while in responding to accidents in small working. Local government officials, mines, but sometimes action is drastic anxious to protect the local economy and not necessarily sustainable in the and their own interests, in some long-term. For example, following a flood instances, have conspired to falsify at Daxing coal mine in Guangdong closures (Xinhua News, China Daily 30 which killed 123 miners on 7 August November 2006). 2005, the provincial government ordered lower level governments to start The fatality rate in Jiangsu, Shandong, destroying some 100 unlicensed mines Inner Mongolia, Shanxi, Hebei, Henan in Meizhou, Shaoguan and Qingyuan and Anhui provinces and regions was counties. Valuable underground less than one in 2007 (Table 5.2). equipment was lost and no Among individual mining enterprises, compensation paid. Several thousand Shenhua Group produced 150 Mt of coal people petitioned the city government in at a fatality rate of 0.021 comparable to Shaoguan in Guangdong and thirteen USA standards and a substantial people were arrested for creating improvement on the average for disturbances. However, some mine KSOCM of 0.96. The Daliuta mine of the owners representing 20 mines in Shenhua Group's subsidiary Shendong Meizhou took a peaceful approach, Company has 600 employees and 57 Safety, health and community impact produced 20 Mt of commercial coal attract high caliber workers and without any fatal accidents. Other large management through good pay. A mines achieved a similar record. The necessary prerequisite is relatively best safety performances are generally simple geology and good mining from modern, fully mechanized, conditions which allow for economically profitable mining operations which can efficient and safe mining. Table 5.2 Some regions and provinces with an average fatality/Mt rate below one (2007) Regions/Provinces Fatalities/Mt Anhui 0.587 Hebei 0.808 Henan 0.871 Inner Mongolia 0.196 Jiangsu 0.366 Shandong 0.154 Shanxi 0.72 Source: The State Administration of Work Safety Table 5.3 shows that safety is poor in 2003 to 2005. Clearly, industrial safety general across coal industry enterprises is a wider issue in China, not just in China, not just in the coal mines. The confined to coal mining and therefore data indicates that coal mines accounted the causes of the poor safety record are for 37 percent of the total fatalities from not only coal specific. Table 5.3 Accident trends in mining enterprises from 2002 to 2005 Coal accidents as a Total Industry and Mine Enterprise Coal mining Industry proportion of total Industry and Mine Enterprise Year accidents The The number of Fatalities number Proportion of Proportion of Fatalities accidents fatalities accidents of accidents % % 2002 13960 14924 4344 6995 31.1 46.9 2003 15626 17326 4143 6434 26.51 37.13 2004 14702 16497 3641 6027 24.77 36.53 2005 13142 15868 3306 5938 25.16 37.42 Source: China Coal Information Institute The reason for government action on were 45 very serious coal mine small mine inspections and closures is accidents, up by 45.2 percent on the that over recent years the number of previous year, and the total death toll accidents and fatalities in TVCM was 1,271, an increase of 75.80 percent. represent over 70 percent of the totals However, the recent situation has been across all types of coal mine. Another improving: In 2007, there were 25 very concern is that fatalities from very serious coal mine accidents, down by serious accidents, in which 10 or more 26.47 percent on the previous year, and miners are killed, have not been the total death toll was 494, an decrease declining (Table 5.4). In 2005, there of 23.29 percent. 58 Safety, health and community impact Table 5.4 Very serious accidents (10 or more fatalities)in coal mining industry from 2000 to 2007 Year Number of accidents Number of fatalities 2000 75 1405 2001 57 1388 2002 59 1269 2003 42 1131 2004 31 723 2005 45 1271 2006 34 644 2007 25 494 Source: The State Administration of Work Safety The incidence of gas explosions is a occurred in Guizhou (837), Sichuan major concern. From 2000 to 2005, 7 (532), Hunan (510), Shanxi (492) and out of the 8 accidents, each of which Chongqing (455), but when expressed in caused over 100 deaths, (Table 5.1) terms of coal extracted the highest involved gas or gas and coal dust fatality rates/Mt occurred in Guangdong explosions. The precise accident causes and Zhejiang. Coal mines in the latter are uncertain as the detailed two provinces are approaching investigative reports are not published. exhaustion. Mines in declining coal Administrative and management mining areas invariably suffer from loss problems tend to be reported, but not of skilled staff, low motivation to adhere the technical details. For instance, to safety standards and can involve SAWS revealed that the Hebei mine in hazardous mining of residual coal pillars. which 108 miners were killed was operating under a mining license that After adjusting the data to remove the had been fraudulently altered. The effects of single, exceptionally major implication is that inadequate incidents (more than a 100 fatalities), the supervision by local government is provinces with the highest average considered a contributory factor. Fuxin severity of coal mine accidents (more Mining Group, in which the worst than 3 fatalities per accident event) are explosion in recent years occurred, Hebei, Henan and Shanxi. This high operates aging mines constructed with severity rate statistic arises due to the the assistance of the former Soviet occurrence of multiple accidents in these Union. Obsolete, unsafe equipment and provinces with 10 or more fatalities entrenched practices hinder safety (Table 5.5). These three provinces are improvement. all in northern China, situated close to The accident reports could provide a industrial markets where production very important source of data for an pressures are high. analysis of the underlying causes of fatal accidents. The highest fatality rates tend to occur in the southern, central and western parts There are major regional differences in of China where the geological conditions coal mine safety performance (Table are difficult, hindering mechanization, 5.5) but in interpreting the relevance of limiting mining scale and complicating the statistics account needs to be taken gas drainage. The explosion risk is lower of the number of events, average in the mines of Shandong and Inner number of fatalities per event (as a Mongolia due to the lower gas content of measure of severity) and fatalities per Mt the coal. Shandong has few small mines mined. In 2005, the most fatalities and a high proportion of the coal 59 Safety, health and community impact production in Inner Mongolia comes conditions. Having the best safety mine from modern, high productivity coal safety performance statistics, mines. Shandong province is the major Shandong's coal mining sector warrants coal producing province in the coastal further study to determine the reasons area with relatively difficult mining for its success. Table 5.5 Statistics of fatal coal mine accidents in different regions 2005 Average Fatalities/Mt No. accidents Region Accident fatalities/e mined with 10 or events Fatalities vent more fatalities Guangdong1 31 174 5.6 (1.7) 57.2 (16.8) 2 Zhejiang 11 16 1.5 38.1 0 Chongqing 349 455 1.4 13.7 3 Hubei 109 129 1.2 12.3 0 Hunan 340 510 1.5 10.4 2 Jilin 136 212 1.6 8.0 2 Guizhou 521 837 1.6 7.9 10 Jiangxi 70 138 2.0 6.7 2 Sichuan 423 532 1.3 6.6 2 Xinjiang 98 225 2.3 6.3 3 Fujian 77 95 1.2 6.2 1 Liaoning2 81 321 4.0 (1.3) 5.0 (1.7) 1 Hebei3 66 315 4.8 (3.2) 4.2 (2.8) 5 Yunnan 165 265 1.6 4.1 1 Heilongjiang4 152 398 2.6 (1.5) 4.1 (2.3) 3 Guangxi 20 23 1.2 3.7 0 Xinjiang 11 13 1.2 3.6 3 Qinghai 12 12 1.0 2.1 0 Beijing 11 13 1.2 1.7 0 Henan 69 210 3.0 1.4 5 Shaanxi 135 216 1.6 1.4 3 Gansu 35 48 1.4 1.3 0 Ningxia 42 29 0.7 1.1 0 Anhui 58 77 1.3 1.0 0 Shanxi 165 492 3.0 0.9 10 Inner Mongolia 56 131 2.3 0.6 3 Shandong 44 42 1.0 0.3 0 Jiangsu 18 7 0.3 0.3 0 Includes exceptional events with fatalities numbering: (1) 123; (2) 214; (3) 108; (4) 171 Values in parentheses show fatality indices after removing major accidents with more than 100 fatalities The statistics provide numerical and policy on coal mine safety spatial information on fatal accidents in improvements. coal mines which are helpful to the Government for monitoring the impact of Co-ordination of government mine safety initiatives 60 Safety, health and community impact On 17 March 2005, a national co- mainly for building up coal mine safety ordination group on mine safety, with an capability in Anhui, Guizhou, Henan, emphasis on gas control, was set up Liaoning and Shanxi provinces. The under the leadership of the NDRC, project is jointly managed by the China involving many government bodies. National Safety Production Supervision Experts were dispatched to the mines Management Bureau, UNDP and the considered to be the most hazardous China International Economic and plans made for the expenditure of a Technology Exchange Centre. further US$360 million at KSOCM on safety, gas control and the acceleration In January 2007, China became a of gas utilization projects, the latter as a signatory to the International Labor means of encouraging more effective Organization's (ILO) convention on gas drainage. occupational health and safety and the Government has committed to A coal mine expert safety group has also increasing cooperation with international been established consisting of 99 organizations to help improve its experts from various sectors, including occupational health and safety government departments, universities, standards. The Government, through science institutes and coal enterprises. SAWS, has pledged to develop better They formed four groups focused on health and safety policies, increase mining, geology, electrical and supervision, introduce risk evaluation mechanical, ventilation, and engineering and enhance education and training. safety. These four groups were involved in major accident site investigations, The Asian Development Bank (ADB), in assessments, validation, safety technical collaboration with SAWS, has initiated a consultancy and trouble shooting technical assistance (TA) project to technical problems at coal mines (China develop a strategy for improving safety Coal News, 13 Oct 2006). conditions in small mines focusing on the Zhengzhou mining area and International mine safety initiatives identifying potential safety projects for Feickert (2007) argues that with ADB financing. continuing determination from the Government of China and a level of The above initiatives show that the assistance from the developed mining Government is focusing seriously on countries greater than is currently being safety issues and is committed to raising deployed, China can move rapidly standards. The involvement of towards achieving international international agencies provides access standards of health and safety. to expertise and experience from outside China. Aid projects, however, are small The Chinese Government has embarked and a current trend is to maximize the on improving mine safety with an domestic input leaving insufficient scope increasing amount of international help for international expertise to inject new from the USA (US$2.5 million ideas. Department of Labor, training for managers), Australia (Federal Safety training and certification Government and mining company Professional standards have recently technology transfer), Japan (training for been raised for the directors of KSOCM. underground foremen), New Zealand SAWS issued a standard early in 2007 (training for managers, underground requiring that senior management must foremen and coal face safety be institute graduates and also have representatives) and, potentially in the three years experience in coal mine near future, the EU. safety, production and technology and two years management experience. From 2007 to 2010, China and UNDP Based on stipulations of "Methods for will jointly invest over US$14 million supervision and checking of coal mine 61 Safety, health and community impact safety training (proposed methods)" (An opencast reserves, China extracts 95 Jian Zong Meikuang Zi [2005] No. 135 percent of its coal from underground. Document), a mine director must be Underground mining is more hazardous certified as qualified both in safety and and manpower intensive than surface for the post. SACMS is responsible for mining. Much of the shallow coal has organizing and implementing training, been worked out in China and the assessment and issuing safety average mining depth is now 400 m. As qualification certificates though local production rates increase, workings are safety bureaus. However, in Shanxi for progressing deeper and gas emission, instance, the director's qualification, outburst, flooding and roof instability which fulfils the same aim, is issued by a risks are increasing. Coal dust explosion separate coal administration hazards are present in 60 percent of the department. There would appear to be coal mines. Spontaneous combustion no independent monitoring of training risks are high in over 70 percent of large standards and courses are not and medium-sized coal mines and more internationally certified. Nevertheless, than 40 percent of mines are highly this is a positive step towards improving gassy or susceptible to coal and gas the competence of mine management. It outbursts. Coal is mined wherever it is the attitudes and examples of senior occurs in China and in some southern management that ultimately determine parts of the country, mines were the safety culture at a particular mine. constructed in the past by governments to provide employment and stimulate SAWS has identified the lack of economic development irrespective of experience and knowledge and low skills geologically difficulty and mining cost. A of the industry as one of the major combination of direct government causes of high accident rates. subsidy and not paying full costs of Graduates are not attracted to work in impact allows coal to be extracted under the industry, once they have been more difficult conditions than would be through university, as the image of coal possible in a true market situation in mining is poor. SAWS and other which the total production cost would agencies are involved in extensive make some of the coal uncompetitive. training but it remains insufficient and, so far, foreign expertise in training is Coal mining in China is therefore being applied only to a limited degree. inherently more risky than in the other SAWS could attempt to co-ordinate the major coal mining countries. Any international input in a more systematic improvements in safety have to manner. overcome overall worsening mining conditions. In developed countries, the Government statistics show that nearly cost of achieving an acceptable level of half of China's 5.5 million miners are safety risk is factored into mining migrant workers from northern Sichuan, projects and mining is discontinued once southern Shaanxi and the mountainous hazard mitigation costs become regions of Jiangxi, Fujian and Henan excessive. China's KSOCM, in contrast, provinces. Less than 10 percent of tend to absorb the costs many of which university graduates from mining-related are not transparent in their current universities choose to work in mines. accounting systems, and continue Consequently, there are many poorly mining despite all odds, irrespective of educated miners in the coal industry. A the economics, using government and major challenge is to ensure that these cross subsidies to finance operations. miners receive adequate training. The approach of the KSOCM to safety is Natural risk factors affecting coal reactive rather than preventative. mine safety Instead of including the costs of risk Unlike the other major coal mining management as part of their capital and countries which have substantial operating costs, they only consider the 62 Safety, health and community impact cost of accidents and fatalities after they safety is compounded by a shortage of occur. While they may pay part of this skilled management and technical staff cost (compensation to workers, (Table 5.6). Underground electrical penalties and lost production) equipment requires expert maintenance themselves, part of the cost is paid by to prevent gas ignition risks. the Government. The incentive to invest Mechanization of coal extraction and in safety improvements and to take transport, and introduction of effective safety issues into account in mining underground environmental monitoring decisions is reduced because the technology, is reliant on skilled staff to Government essentially subsidizes risk. install, maintain and operate. Many It might be argued that privatization of all gassy mines have installed gas drainage coal mines would have the effect of systems but they are often ineffective placing full responsibility for safety on and can introduce new hazards. 96 individual firms, raising the financial percent of the large coal mining incentives to improve safety standards. enterprises are short of mechanical and However, this would only work in a well- electrical professionals and 88 percent regulated coal industry and such of them are short of mining conditions are far from present in China. professionals. The way forward in China must come through stronger Government Technical skill levels among the main enforcement of safety regulations and force of underground workers are very larger penalties to force mines into low as a large proportion of them, about improving risk management. half in KSOCM and practically all in TVCM, are rural migrant workers. The Deficiencies in safety management training is poor and appreciation of Weak safety management by mining safety and self-protection is low. One enterprises with a deficit of 69.8 billion problem is that workers judge that the yuan expenditure on safety projects rewards they are offered, relative to were identified in an inspection of 56 key what they can earn elsewhere, justify the coal enterprises by safety experts in risks that they take. 2005. The problem of under spending on Table 5.6 Education level of mine employees (mines greater than 0.3Mtpa) Education grade Proportion of total (%) Senior technician 3 College graduate 5 Middle school 63 Primary or none (1) 29 (1) Deduced by difference Source: Study Team Safety administration, regulation and elevated SAWS to ministerial level and enforcement formally established the State The Government has responded quickly Administration of Coal Mine Safety to major mining accidents in an effort to (SACMS) as a separate organization in control the problem. A devastating coal its own right at deputy ministerial level mine explosion on 14 February 2005 in within SAWS. the Sunjiawan workings of Haizhou shaft killed 214 miners in Northeast China's SACMS was allocated a permanent staff Liaoning Province. A few weeks later, of 48, a relatively large number of staff the State Council dismissed the Vice- compared with the 160 total of SAWS Governor who was responsible for responsible for all other industries industrial safety in Liaoning. It also (China Coal News 29 March 2005). This number of staff would be sufficient for 63 Safety, health and community impact managing the provincial and regional chief and also expelled from the city's safety bureau if the tasks of monitoring standing committee of the Communist coal production and gathering Party of China (CPC) for breaching his information that were inherited from the duty of supervising the mine's work former Ministry of Coal Industry were safety. The mine owner and others relinquished. However, there is no other thought to be responsible for the incident central organization to transfer these were arrested. Punishment can be an tasks to. Furthermore, even more coal effective deterrent, but only if industry management tasks have enforcement is sufficiently effective to recently been passed to SACMS from ensure a high probability of malefactors NDRC. being caught and prosecuted. The effectiveness of the safety Due to the perceived high degree of administration has been compromised collusion between local officials and coal by failures and collusion of some local mine owners, the Government requires officials but the Government has taken that the national body, SACMS determined steps to eliminate these investigate serious coal mine accidents. deficiencies. Investigations were This is again a positive step because it conducted into nine explosions that increases the degree of independence occurred in the industry in 2005 that with which investigations are conducted resulted in a total of 270 deaths. Official and it brings China's mine safety prosecutors found 46 local work-safety inspection procedures more closely into officials guilty of dereliction of duty for line with those in developed countries. not enforcing laws that could have prevented many or all of these In the six years since SAWS was given accidents. In the first nine months of the mandate to decrease the number of 2006, seven director-level officials at China's coal mine accidents, it has various coal mine safety administrations imposed increasingly stringent safety in Shanxi were prosecuted for corruption regulations, but has yet to establish a (Xinhua, September 14, 2006). This consistent and effective enforcement demonstrates the seriousness of network across the country. Tu Jianjun Government in tackling underlying safety (2006) suggested that the following critical issues. measures are necessary if safety improvements are to be accelerated: (1) However, deterrents have not been establish transparent, legal and strong enough as illustrated in the institutional frameworks to protect the following example. A methane explosion interests of all stakeholders; (2) set an occurred on 5 December 2007 at Xinyao aggressive quantity based safety target; coal mine, a TVCM in Hongtong County, (3) hold local officials accountable; (4) Linfen City, while 128 miners were allow for additional media and working in the mine. 105 miners were grassroots monitoring; and (5) eliminate killed. There should have been no more incentives that seriously distort safety than 100 miners on a shift according to a statistics. regulation implemented by Shanxi coal mine authorities. The mine's registered Effective systems for responding to mine annual capacity was 210,000 tons, but accidents have been developed in the owners illegally expanded it to China. The authorities can act quickly to 500,000 tons in 2005 (Shanghai Daily, launch rescue teams, investigate the 18 December 2007). Apparently, county accident, identify those responsible who officials inspected the mine in late should be punished and compensate November, 10 days before the gas families of the dead miners. explosion but did not report any Compensation for families of miners workplace hazard. Following the Xinyao killed in accidents has been raised to accident the mayor of Linfen city was over US$24,000, almost triple the removed from his post of deputy Party previous cap. However, greater attention 64 Safety, health and community impact is needed to prevent mine accidents. accidents and 43 percent of fatalities in The safety administration needs more 2005 according to SACMS. resources at a local level, and greater powers to inspect mines, stop National safety regulations are not production and levy punitive fines always fully complied with at local against any mine or official that government levels suggesting that contravenes safety laws. benefits may arise from a liberal interpretation of the rules. An example A plethora of instructions by provincial of local government overriding safety and local government have been issued regulations is when the use of low to mines. Coal production at mines that concentration CMM engines for power do not comply will be stopped while generation is condoned. These engines improvements are carried out. Failure to are designed to utilize gas with less than undertake suitable remedial measures 30 percent methane concentration and, can lead to permanent closure. The at many sites, the drained gas is in the instructions are sound but there is explosive range of 5-15 percent insufficient practical guidance for methane in air, which is neither systematic implementation. There is a permitted nor safe. The NDRC is pressing need for education and training reviewing this problem and weighing to ensure project and mine designers, energy gains against safety issues but and officials and management so far has not reached a decision. understand the current best practice and the fundamental principles of mine To increase its effectiveness, SACMS safety. Investment in safety equipment needs to be able to confidently delegate alone will be wasteful, and the results in responsibility for inspection and terms of reduced accidents may be enforcement to provincial level. disappointing. Enforcement of safety regulations must be strengthened. Suitable and qualified Both knowledge and respect for the law staff must be recruited and trained. All and regulations by mine owners and inspectors should be appointed by, and mine developers is weak as is indicated be held accountable to, provincial safety by the many reported instances of illegal bureau. The inspectors should have the mine construction and illegal mining. power to halt any potential dangerous For example, in early 2005, the SAWS mining activity and their employment identified 17 illegal KSOCM construction conditions should be sufficiently projects and requested immediate attractive to deter corruption. Examples cessation pending proper approval of of how mines inspectors are recruited, construction and safety procedures. trained and empowered in Australia, the The operation of small mines without USA and the UK are shown in Box 5.1. permits is rife, making safety Lessons for China are the powers administration problematic. Operational available to mines inspectors, long violation of regulations is also a major training periods and generous problem which led to 57 percent of employment packages. Box 5.1 Recruitment, rewards and roles of mines inspectors in some developed mining countries Australia, New South Wales Mine safety enforcement in NSW is undertaken by inspectors and safety officers of the NSW Department of Primary Industries (DPI), Mineral Resources Branch. These officers are given powers under legislation to enter any mine, at any time, for the purposes of inspecting the mine. They can prosecute mine owners and managers in the event of a breach. Prosecution is considered in all instances where a significant breach of 65 Safety, health and community impact legislation is discovered which cause, or are likely to cause, death, or serious injury or ill health; or- continue to occur after other representations or interventions by the Department; or- which interfere with the proper investigation of causes and circumstances surrounding an event. Inspectors tend to be proactive in educational awareness and advisory roles. The DPI frequently publishes Safety Alerts, often describing a serious incident that has occurred on a mine site either in NSW, or elsewhere in Australia. It also hosts safety seminars to address specific areas of concern. USA The Mine Safety and Health Administration (MSHA) is the federal agency under the Department of Labor in the USA charged with inspection of mining operations nationwide for adherence to regulations designed to protect the safety and health of working miners. It recruits staff through open advertising. Selected candidates participate in a formal two- year training program. They should be able to perform arduous duties and can expect a starting annual salary of about $43,000. In addition to a 40-hour working week with generous annual, sick and holiday leave, selected candidates are offered health, life and long-term care insurance; pensions, including a tax-deferred savings plan; travel reimbursement; and flexible spending accounts for medical and dental expenses. UK The role of the Mines Inspectors within the UK Government's Health and Safety Executive is to inspect mines (of all types of mineral including coal) and to advise managers and others not only on compliance with the law, but on what they consider to be good practice. They also investigate accidents and incidents in mines. Mines Inspectors have a wide range of legal powers that they can use to enforce compliance including, if necessary, though the judicial system. They have powers to immediately stop work where they perceive an imminent risk to health or safety, and powers to require improvements in other circumstances. Mines Inspectors in the UK are only recruited after they have spent several years in a senior management position at a large mine. Inspectors are completely independent of the mines they inspect and their salary levels are similar to managers of large mines. Inspectors have a range of responses to breaches of the law ranging from verbal warnings to written warnings, cautions, enforcement notices or citations, withdrawal of permissions and, ultimately, prosecution. A mining inspector will visit a large coal mine about 20 times a year covering the whole range of activities at the mine. Electrical and mechanical engineering inspectors both make about 10 inspections each year at each large coalmine. Smaller mines and low hazard mines are inspected far less frequently. All inspection reports are entered onto a national database that inspectors can access and search at any time to ensure consistency and also to monitor trends. Compensation for fatal accidents Compensation is not the only cost faced Inadequate compensation for the death by a mine after a serious accident. In of a miner reduces the incentives for addition, there are other costs imposed mine owners to improve safety on mine operators including legal costs, standards. A significant step was taken damage to reputation of the company by the Shanxi Provincial Government on and the individuals responsible, 30 November 2005, when it increased penalties imposed on responsible the minimum amount of compensation to persons, loss of income while mining 200,000 yuan (US$25,000) per coal operations cease and damage to mine fatality, a move that in turn was equipment and structures as a result of adopted by other major coal producing the accident. The costs of accidents are provinces. substantial. It is important to recognize this fact, as failure to do so will lead to wrong solutions being proposed. 66 Safety, health and community impact cover up fatalities so as to avoid fines, The Shanxi Government decided that further distorting death tolls. the new regulation was insufficient, but rather than increase the amount of Fines are more effective if aimed at compensation required, officials instead preventing accidents through a range of imposed an additional fine of one million penalties for safety breaches. However, yuan (US$130,000) per coal mine there should still be punishments for fatality payable to the local government individuals responsible for accidents to itself (People's Daily, November 1, reinforce the incentives for management 2005). The incremental penalty was to operate mines safely. The important counterintuitive because it not only benefits of prevention are fewer deaths, turned the widespread coal mine fewer compensation claims and less accidents into a lucrative source of production time lost. The USA's coal revenue for the authorities who collected mining industry has an excellent safety the fines, but also offered significant record and a major contributory factor is incentives for mine owners to reach a robust inspection regime and strong private deals with miners' families to punitive action for safety violations (Box 5.2). Box 5.2 Severe financial penalties for violations of safety regulations are a better way to prevent accidents than large fines after the event To encourage mines to strengthen accident prevention, the U.S. Department of Labor's Mine Safety and Health Administration (MSHA) has recently handed out maximum civil penalties against a mine operator amounting to a total of US$440,000 for failing to adequately support the roof and failing to follow the approved roof control plan. The hazards (hidden dangers) were identified during a routine inspection of the mine and cited as "flagrant violations" under the Mine Improvement and New Emergency Response (MINER) Act. "Mine operators that show reckless disregard for the well-being of their workers must be held accountable for their actions," said Richard E. Stickler, assistant secretary of labor for mine safety and health. "It was highly likely that a miner would have been seriously injured if these conditions were allowed to persist, and the purpose of this enforcement action is to prevent accidents and injuries from occurring in the first place." A flagrant violation is defined as "a reckless or repeated failure to make reasonable efforts to eliminate a known violation of a mandatory safety and health standard that substantially and proximately caused, or reasonably could have been expected to cause, death or serious bodily injury." Under the MINER Act, a civil penalty of up to $220,000 may be assessed for each flagrant violation. Costs of coal mining accidents improvements are made and inspected In China the financial impact of an ­ although it is patently clear that many accident is largely viewed in terms of still continue mining during this stage. direct compensation and payments of Coal mining enterprises, of all sizes, fines. Substantial coal production can be should analyze the true costs of lost, especially from small mines which accidents as this would underline the may be halted for several months while benefits of prevention (Box 5.3). Box 5.3 Full costs of mining accidents 67 Safety, health and community impact Mining companies in Australia do not publish direct costs of mining accidents but they can be deduced from industry information. Fortunately, fatalities are rare. The last multiple fatality occurring in 1996 when four miners died at Gretley colliery as a result of an inrush of water. Xstrata coal purchased the assets of Newcastle Wallsend Coal Company Pty Ltd which owned the Gretley coal mine. After a vigorous prosecution Xstrata was fined $1.46 million and four officials fined collectively A$102,000. Prosecutions in NSW have since increased and currently around 15 separate cases are in progress. As a result of the Gretley accident, a mine safety review was carried out which lasted six months and resulted in changes to legislation. For a fatality at a mine, total costs could include (Galvin personal communication): · Direct loss of revenue o Ranging from loss of one day minimum (union-directive for all mines) to one week's production (in the case of one company) o For a 5 Mtpa operation this is in the order of A$500,000 · Investigation costs, including legal advice, legal monitoring of interviews etc. 4 weeks x 2 persons x 12hrs/day x $400/hr = $192,000 · Coroners legal costs ­ $150,000 · Prosecution legal costs ­ $300 000 to $1.5 million, depending on how vigorously the matter is defended and appealed. · Occupational Health and Safety fine ­from $300,000 to $1,500 000 · Common law claim ­ $750,000 times number of dead or incapacitated ­ covered by insurance · Compassionate payment to family ­ $50,000/family · Ramp back to full production and morale after fatality ­ three months reduced coal output Accidents may also result in: · Damage to equipment and to structures · Increased insurance premiums · Damage to company reputation which could impact on future business dealings · Additional compliance, especially as safety officials may take a closer look at the operations of the company and engage in closer monitoring after the event It is estimated therefore that the total cost to an Australian coal mining company of a fatality is in the range A$3 to $10 million. For a non fatal injury or accident a mining company may incur medical costs, equipment damage, loss of production and damage to reputation. Application of technology manual mining operations comes from Increased mechanization is seen as an instructions from SAWS and NDRC important measure for improving work limiting the number of longwalls in an safety, and reducing the number of underground mining area to no more miners underground and at risk, and than two and allowing no more than 100 various means are being employed by men per shift to work in a particular the Government to promote this. Mines underground mining area. that concentrate all their coal production on one face can be certified as high There is insufficient understanding of efficiency which raises the status of basic principles. For instance mine senior management, helps their career management should be more aware of development and is thus effective. the effect of barometric pressure on Further impetus to mechanize mines underground gas emissions. A methane and hence reduce more hazardous explosion occurred at 11:15 p.m. Wednesday 5 December 2007 at Xinyao 68 Safety, health and community impact coal mine, a small coal mine in change in affecting methane emission Hongtong County, Linfen City, killing 105 risks in coal mines should be examined miners. The explosion occurred after a more closely in China. The phenomenon prolonged barometric pressure drop is recognized in developed mining over more than 24 hours at a rate of countries. For instance, the 0.89mb/h reducing to 0.67mb/h (Figure meteorological office in the UK issues 5.3). While such rates of barometric pressure fall warnings to coal mines to pressure fall are not high, the steady fall allow precautionary action to be taken to would have resulted in a period of control the emission hazard. It must be elevated methane emissions from goaf stressed that the latter is not the only areas that could have contributed to the causal factor and other causes of gas accumulation of gas. Clearly, there was emission and accumulation also need to also a failure to control ignition sources. be controlled The possible role of barometric pressure Sunday 2nd to Saturday 8th December 2007 Explosion occurred Figure 5.3 A major explosion occurring after a prolonged barometric pressure fall The fundamental safety principles of gas reliant on less sophisticated manual control are dilution of gas to safe mining methods. Some of the earliest concentrations by ventilation, large mines, for example Jixi, Fuxin, minimization of volumes of explosive Fushun, Kailuan, and Jiaozuo were built gas and ensuring that potential ignition during the 1950s with the assistance of sources and gas accumulations are not the former Soviet Union and are still juxtaposed. The latter principles are not persevering with obsolete equipment, applied rigorously in China's coal mines. some of it unsafe by modern standards. This is particularly exemplified by the fact that gassy mines are allowed to Scientific research on safety issues in capture and drain gas with a China is insufficiently advanced and composition in the explosive range, and needs greater investment. Moreover, furthermore are effectively encouraged language barriers have limited to continue this practice after installing exchanges of ideas with the international low concentration CMM generators mine safety community. Specialist capable of utilizing the gas. Thus, design institutes involved with safety and explosive gas mixtures are allowed to gas drainage are relatively few and tied accumulate underground, in pipe-work too closely to safety equipment and pass through moving machinery. manufacture which stifles development. Safety protection measures reduce the Some SOEs have received government explosion risk but any failure could be grants to develop and implement new catastrophic. A safety regulation that technology, but instead used the aid to only methane of 30 percent subsidize sales. This is concentration or higher can be utilized is counterproductive as it hinders not enforced. competition, discourages companies from investing in their own R&D and acts The equipment and technology is as a barrier against imported products. relatively backward in many mines with 83 percent of KSOCM mechanized, but The operators of large, gassy mines are mines of other types remain mostly responding to the requirements set by 69 Safety, health and community impact the Government to improve gas control, product performance and quality which and more gas drainage systems are will ultimately benefit the Chinese miner. being installed. Of the 286 former key State-owned coal enterprises with gassy Investment in safety improvements mines, 260 have started gas extraction and in the first 8 months of 2006 1.66 A safety equipment survey of KSOCM Bm3 of gas was extracted and 352 Mm3 conducted in 13 provinces by MOF, used, 80 percent by domestic NDRC and SAWS in 2003 identified a consumers and 20 percent for power 50 billion yuan (US$6.4 billion) generation. The utilization efficiency is deficiency in spending. The precise low at 21 percent, but the data may be details of the inspection methodology incomplete. have not been published. As this requirement represents a cumulative Standardized gas drainage designs tend problem over a number of years, the to be imposed which are not always annual cost per tonne that should be appropriate to the geology and mining spent on safety equipment is not easily conditions, although it is conceded that determined. The real problem would for a gassy mine to have at least appear to be lack of replacement capital. installed a gas drainage system is a While mining enterprise accounts carry positive development. Individual coal depreciation provisions there is no mine operators have little scope to make attempt to offset this with a replacement technical changes and improvements. capital fund. Any such changes generally have to be approved by referring to higher levels China's coal mines expected to pay a within the mining enterprise and, in total safety fee of 24 billion yuan in 2006 some instances, to the provincial and by October 2006 20 billion yuan had government. The fact that provincial been paid and 18 billion yuan invested vice-governors with safety on mine safety projects. In 2006, NDRC responsibilities are now held also directed companies to undertake accountable for serious mine accidents 536 coal mine safety improvement could further inhibit innovation due to the projects at a total investment of 13.5 extension of the decision making billion yuan. This comprised 2.5 billion hierarchy and risk aversion on the part yuan national debt, 0.7 billion yuan from of these officials. Initiative may be local government and 10.3 billion yuan stifled, but the risk of a bad decision is from the mining companies. reduced. The net result will be slower progress. Improving safety in TVCM Any policy must address local Gas monitoring systems are being government dependencies on mining for widely installed but reliability is revenue, their capacities to implement sometimes questionable due to poor national closure policies, the need for quality of equipment, and lack of extra or alternative employment for poor calibration and maintenance facilities. farmers and the energy requirements of Suitable, reliable, advanced monitoring local economies. systems are readily available on the international market but protracted Socio-economic policy should view small electrical safety approvals procedures coal mines as much a part of the rural are delaying their introduction. The lack economy as of the energy economy. It of compatibility between Chinese and would also start from the premise that current international mining equipment poor farmers require support in standards also precludes Chinese sustaining the agricultural component of manufacturers from access to world the local economies. markets for the export of equipment ­ desirable as a driver for improvement in Any safety policy must include basic miner training for the rural farmers 70 Safety, health and community impact working in the industry, before they enter counts in order to avoid mine closures or their first mine. This would have to be fines that may compromise their security funded by the local authority through an of tenure. existing revenue stream. Teams of skilled trainers and a training package Small mines can be operated safely if specifically adapted to small mine supported by a suitable regime as has conditions would be required. been demonstrated in the USA by MSHA. Since the creation of its Small Safety inspection is critical in small Mines Office in 2003, small mining mines, but the concept of worker safety operations (employing five or less representatives may not be readily miners) experienced a 66 percent accepted by owners or local authorities. decrease in fatality incidences, bringing A first stage is to raise the frequency them into line with the large mines, and standard of official safety within five years. The Small Mines inspections and to ensure that workers Office combines robust enforcement and are free to exercise the right to withdraw assistance to small mine operators in from hazardous workplaces. Training for developing safety and health programs workers in risk awareness and appraisal tailored to their specific operations would be an essential component of this (Walter L, 2008). SACMS should strategy. This would add a worker based examine this process. approach to safety organization in small mines. Further changes are needed While great efforts are being made by Owners would be encouraged to adhere the Central Government to improve mine to safety regulations through the safety there is a need to change imposition of higher penalties and an attitudes among management and increased chance of being caught and workforce before significant reductions prosecuted. in accidents will be achieved (Appendix 3). Secure tenure over the mining property would also provide the incentive to In the 11th Five Year Plan, the invest in modernizing the operation and Government intends to reduce the rate upgrading safety equipment. The lack of of coal mine fatalities by a modest 5.5 legal protection for private investment is percent per year, reaching 2.1 (some a primary factor behind the failure to reports state 2.2) per Mt of coal mined in impose safe working standards on 2010. This target has already been TVCM. While private ownership of reached and is therefore not sufficiently TVCM has increased, no legal challenging, especially in the light of the framework was established to protect positive achievements in Shanxi of a rights and investment. Governments can reduction to 0.8 fatalities per Mt in 2006. close small mines on grounds of scale as well as for failure to comply with The Government has adopted some of regulations and procedures. Without any the safety management measures long term legal guarantees of ownership applied in developed coal mining rights, private mine owners are generally countries, such as training and unwilling to invest in the necessary management qualification requirements, safety requirements, resulting in unsafe and there are other changes that it could working conditions for the miners. This make to further increase the is evidenced by the much higher fatality effectiveness of the safety administration rates in the TVCM (Tu Jianjun, (Box 5.4 and 5.5). These include Jamestown Foundation. China Brief, appointing a safety administration whose Volume 7, Issue 1, 25 Oct 2006). This only activity is improving work safety, factor may also explain the unreliable establishing a regime aimed at coal mine fatality statistics as some prevention by implementing risk owners of small mines falsify death assessment procedures, replacing 71 Safety, health and community impact prescriptive regulations with more detailed accident reporting and performance-based regulations and analysis. Box 5.4 The effective management of health and safety in deep coal mines in the UK The underground coal mining industry in Great Britain is among the safest in the world and fatal accidents are a rarity. This situation was established even before the recent decline of the industry. All industrial safety matters are the responsibility of the Health and Safety Commission (HSC) and its operational arm, the Health and Safety Executive (HSE) which advises on, promotes and enforces health and safety legislation on behalf of the Government. The HSC is a representative body including members from employers, trades unions, consumers and local government. It has a number of advisory committees, including one for deep mined coal, whose main purpose is to advise the HSC on the adequacy and practicability of its proposals. Unlike SAWS and SACMS this organization is wholly focused on safety with no industrial operational management responsibilities. In recent years development of safety legislation has moved from being disaster-driven, as in China, to an approach that requires employers and managers to identify hazards, assess risks and to take steps to avoid or control them. That is, to prevent accidents and incidents rather than react to them. China's coal industry is starting to move in the direction of risk management, but implementation will be limited until mines carry all the costs of accidents, and safety regulations are enforced. Health and safety management legislation Current British health and safety legislation places duties on employers to ensure that they have in place safe systems of work. Modern legislation does not prescribe what should be done but what should be achieved (a performance based approach). For example, the Management and Administration of Safety and Health at Mines (MASHAM) regulations require mine owners to ensure that their mines are worked in accordance with the provisions of health and safety law. Not only do owners have to comply with their legal duties, but also they have to have design and implement procedures to ensure that people who work in their mines comply with the legal duties placed on them. Mine owners therefore have a legal incentive to ensure the safety and health of people that work in their mines. The mine owner has to appoint a sole manager who is suitably qualified and competent in safety matters before a mine can be worked. Coal mine managers have to be certified and must have had several years of practical experience in coal production, and several years as a supervisor. They also need to hold a recognized mining academic qualification and to have passed an examination in health and safety law. This is now also a mandatory requirement in China. Senior members of the management team are responsible for ensuring that supervisors are properly implementing risk control measures and the supervisors responsible for mining operations are also responsible for the health and safety of their charges. The legal responsibilities of workers focus on complying with specific parts of the law and with any health and safety rules or instructions, and reporting danger. They also have legal duties to co-operate with employers on health and safety, and an overriding duty is not to put themselves or others at risk through their acts or omissions. In summary, the law requires that: · mine owners should have a clear health and safety policy · there should be a mine management structure that contains a sufficient number of competent and suitably qualified people who are capable of implementing that 72 Safety, health and community impact policy and ensuring that health and safety law is complied with · there should be clear procedures and methods of safe working · the policy, management structure and procedures should be monitored to check that they are working effectively · workers have legal responsibilities to comply with health and safety policies · safety management systems should be audited and reviewed, periodically or when a significant change occurs. Coal mining companies have realized that the investment in reducing accident and health related losses can bring a higher return than the investment of a similar amount in increasing production and sales. Box 5.5 Safety performance of the Australian Mining and Minerals Industry Mine safety is a concern in all coal mining countries. Safety becomes increasingly acute when there is pressure on mines to maintain high output levels. This has been a particular problem in China. In December 2006, Australian union leaders drew attention to an apparent decline in safety standards after the sector's third death in Queensland in less than six months. There were only two deaths in the state in the previous financial year. Union leaders stated that miners were forced to work long hours in sometimes unsafe conditions by management to exploit the worldwide resources boom. At the same time government statistics showed an increase in potentially fatal near-misses, a rise in the severity of accidents in underground coal mines and a large increase in the number of disabling injuries. The Queensland Mines and Quarries Safety Performance and Health Report for 2005-2006 showed 839 near-misses reported in the period, an increase of 124 from the previous year and the highest number since records began. The number of disabling injuries rose from 384 to 515. Medical treatments rose from 492 to 758. The significant difference between the situation as described in Australia with that in China is the seriousness with which single fatality accidents are treated and the importance given to monitoring non-fatal accidents in the former. Accident reporting The Minerals Council of Australia (MCA) reports safety trends across the whole of the minerals and mining industry in terms of the fatal injury frequency rate (FIFR = fatalities per million hours worked) and lost time injuries (LTIs). This rate has varied widely from year to year around an average of 0.07. In 2004/5 the underground coal sector recorded zero fatalities. Within the coal sector, underground coal experienced the most LTIs (381) followed by open-cut coal (194) and brown coal (5). Mine safety legislation Australian OH&S legislation is founded on the recommendations of the Robens Inquiry into workplace safety in the UK in the early 1970s and on ILO Convention 155. A core principle is that individuals should be held accountable, within the bounds of what is reasonably practicable, for OH&S in areas of work that they control. There is considerable variation between Australian states in the manner in which OH&S legislation is framed and administered. The obligation by an employer to provide a safe workplace is a reasonable principle, but the legal severity with which it is applied in NSW places a heavy burden on management and China should not proceed to this extreme. Australia's mine safety achievement In the last 2 decades there has been over a 90 percent reduction in lost time injuries and fatalities in the Australian minerals industry to levels that now rival many other industries. The Australian coal sector represents international best practice, with a fatality rate of 0.5 73 Safety, health and community impact in 2004, one third that of the United States and one quarter that of South Africa. These results have been achieved primarily by adopting a risk management approach for establishing a safe workplace environment and China should examine this principle closely. attempting to sever local government Wang Xianzheng, director of the State investment links with privately owned Administration of Work Safety coal mines. SAWS recognizes that acknowledges that China lags far behind safety training of coal industry the developed countries in mine safety employees, especially at management (China Labor Bulletin, Safety Standards levels, is essential and several programs in Chinese Mines ­ What are the have been established with international International Standards? 2004). Li partners to achieve this, in addition to Yizhong, Minister of the State training carried out in the nation's own Administration of Work Safety (SAWS), institutes and universities (Feickert said that lax laws, rules and regulations 2007). and ineffective enforcement had contributed to the serious work safety The Government of China emphasizes situation that has plagued the country for the importance of technology in many years (Fu Jing, Improvement improving mine safety. Technical Promised on Work Safety, China Daily, improvements certainly help but are June 19 2006, p.2). Maximum insufficient by themselves. Without punishments of a seven year prison proper training and use they can be sentence and company fines of up to ineffective or even introduce new 200,000 yuan (US$ 27,000) were hazards in the absence of proper inadequate. By comparison, in the U.S.A controls, as mechanized mining did at executives could face life-time first in Europe. Incidences of lung imprisonment and in Australia disease climbed as machine cutting executives could be barred from the speeds and dust levels rose prior to the mining business. Higher fines also development of dust suppression applied elsewhere. technology. Historically, other developing economies Pringle and Frost (2003) identified the have experienced an "accident-prone barriers that Chinese workers faced in period." For instance, the UK and the general in all industries to securing their USA each experienced such a period for safety. These included the decline in 70 years (1880-1950) and 60 years government authority, the responsibility (1900-1960) respectively, when their for health and safety resting with GDP per capita reached US$1,000 to numerous and diverse local authorities, US$3,000; and Japan experienced that the lack of investment in safety systems, period for 26 years (1948-1974) when its the inadequacy of the inspectorate and GDP per capita reached US$1,000 to the failure of the All China Federation of US$6,000. However, China has the Trade Unions to organize workers advantage that it can learn from the around safety, the complexity of extensive and accessible previous administrative changes resulting from experience of the developed mining government restructuring and the influx countries and should be able to move of an impoverished and untrained quickly beyond this stage (Li Yizhong migrant workforce into many sectors, 2006). including coal mining. Pringle and Frost took the view that imposing a "top-down" China's main response to the serious structure of rules and regulations was industrial safety and health situation has unlikely to succeed and a "bottom-up" been largely administrative and "top approach was necessary. down". Efforts have been directed towards stricter supervision and The role of trade unions in improving enforcement and tackling corruption by industrial health and safety 74 Safety, health and community impact Various studies have shown that trade in the event of immediate danger. If unions provide a positive force in management does not take the improving safe working. A study of coal necessary action, they can organize mining in the USA in the early part of the workers to take the necessary measures twentieth century showed that unionism to avoid risk and to submit reports lowered accidents by around 40 percent immediately. and was most effective at mine level, possibly through miners refusing to work Moreover, in 2006, the State in unsafe workplaces (Boal 2003). Administration of Coal Mine Safety and the All-China Federation of Trade In a study of British manufacturing it was Unions announced that they would join shown that those companies which had forces in a campaign to improve migrant trade union health and safety workers' health and safety. The aim is to committees experienced half the injury ensure suitable training is provided and rate of those which managed safety that the legal right of workers to refuse without unions or under joint hazardous work without fear of dismissal arrangements (Reilly et al 1995). or intimidation is enforced. Official Another study, analyzing the same statistics show that 75 percent of those figures, reached the conclusion that killed in 2005 in coal mines and on arrangements where management deals construction sites were migrant workers. with health and safety without consultation with the workforce resulted Worker safety inspectors in higher injury rates. The current "top-down" approach to Debate on the union role in coal mines improving health and safety in coal has surfaced again in the USA after the mines is not proving effective due to Sago, West Virginia and Darby No 1, institutional and cultural complexities. Kentucky mine disasters. Neither of The people most affected, and those these two mines was union-organized. most able to act effectively to prevent Of the 33 miners killed in US mines in accidents, are the miners themselves. A the first five months of 2006 only three safer industry can be achieved by worked in union mines (Feickert 2007). It developing a European-style risk is arguably not the presence of trade assessment and social partnership unions that leads to safer working, but approach similar to that of the British, the confidence imbued in the workers to Australian and New Zealand coal take a more active role in determining industries, the core of which involves the working conditions. safety triangle of mine manager, government inspector and worker In China, the role of unions in health and inspector. This approach requires strong safety has recently been the subject of leadership from government, industry discussion and decision at the National and employers. The Government of People's Congress, where the Prime China has taken the first step towards Minister called on trade unions at all increasing the role of workers in levels to bring their role into full play accident prevention with the decision in "especially in work safety supervision" to May 2005 to appoint 100,000 worker better safeguard workers' interests safety supervisors or inspectors. These (People's Daily Online, Premier Stresses worker safety inspectors must be Role of Trade Unions in Work Safety suitably trained and empowered to carry Supervision, 14 March 2006) out inspections on behalf of fellow workers and represent them to Trade Union Occupational Health and management. The most effective Safety Inspectors, under Article 5.8 of systems in other countries are those the Regulations, are entitled to where the workforce themselves appoint recommend that management take their own worker safety inspector urgent measures and evacuate workers (Feickert 2007). Further details are provided in Appendix 4. 75 Safety, health and community impact could be substantially improved if the The role and rights of safety safety triangle system based on worker representatives, both worker and union, inspectors, managers and government are enshrined in European law and also inspectors (Feickert 2007) were to be in health and safety regulations in other adopted. countries (Feickert August 2006). For instance, in Australia the union safety In summary, the Government has official covering several mines in an area introduced many initiatives in China over has the power to suspend operations in the last few years in its drive to improve the event of operator non-compliance mine safety. The effectiveness of these, with the law which is endangering the scope for further enhancement and workers. In New Zealand, worker safety any undesirable side-effects are representatives can issue a hazard reviewed in Table 5.7. Most of the notice and advise workers to refuse improvement has been in the small dangerous work when faced with mines where the largest change was imminent danger. Safety representatives needed. In comparison, despite are protected. considerable expenditure and effort, improvement in KSOCM has not been Many of the new Chinese worker so significant over the last five years. inspectors have been appointed to local The principle reason for this is the mines and their wages are paid by the absence of a mechanism which involves state, to maintain their independence workers in hazard identification and from the owners. In the KSOCM, the safety inspection. However, much safety structure already includes worker groundwork has been done to provide a and union involvement, although this basis for achieving further improvement. Table 5.7 Factors contributing to China's improvements in coal mine safety and opportunities for further improvement Factor Comment Safety training for miners A massive effort has been made to recruit and train the trainers by government and educational institutions. All miners are required to attend induction and refresher training and lose pay if they do not complete the courses. This is a positive step but the quality of training should be monitored and courses refined to incorporate modern learning aids. The traditional Chinese method of teaching by rote is not effective and more interactive methods should be introduced. Increased safety Effective training programs will be well designed, well awareness through presented and interactive. A combination of continuous training and certification assessment during the course and examination will ensure of mine managers and fair appraisals and prevent collusion to short-cut the officials procedures. The certification process involves overlapping functions of two different government departments which needs to be resolved and simplified More stringent safety Inspections seem to be concentrating less on checking paper inspections work and more on examining operations which is a positive move. However, safety bureau inspectors do not have sufficient power to halt mining activity without consultation with their seniors, although they can impose punitive fines Regular safety events Mainly aimed at KSOCM. Safety competitions, first aid, and competitions rescue and quiz shows raise safety awareness among organized at mines by miners and mine officials. Team spirit is engendered and SAWS knowledge is learned through fun. Success is difficult to measure but most mining countries and large international mining companies engage in this type of activity 76 Safety, health and community impact Factor Comment Proportion of pay linked This provides a strong incentive to officials to place safety to safety performance of first. However, the system is reduced in effectiveness if officials in KSOCM miners can earn production bonuses. Production incentives can help to improve efficiency, but require a strong safety regime. Senior line management Accountability from the top down ensures a positive approach and government officials to accident prevention. However, in top heavy KSOCM with mining responsibility management hierarchies this could slow innovation as SOE are held accountable for culture is to minimize career risk by avoiding decisions which serious fatal accidents change the status quo. Accountability extends to the vice and can be punished Governor with mining responsibility who must also be with dismissal convinced of the wisdom of making any innovative change. Raising minimum scale Prescribing the minimum size of mine reduces the total of production to facilitate number of mines which makes regular safety inspection more introduction of feasible. The mine should also have sufficient scale to mechanized longwall practice longwall mining, subject to geological provisions. mining in all coal mines The downside is that a capacity criterion is arbitrary and does not recognize that economic factors differ in each place Installation of safety Throughout the country 12,287 mines have installed gas monitoring systems with monitoring and control systems. These consist of 556 financial assistance from KSOCM (76% of the total), 1157 SOCM (83%) and 10574 government TVCM (75%). However, much of the gas monitoring equipment is inaccurate and unreliable. Imported equipment is considered too expensive by mines. To have installed a system is a first positive step, but equipment standards need setting and enforcing to achieve effective safety protection. Installation of gas 93.5% of the gassy KSOCM (272 out of 291) are practicing drainage systems in gas drainage, extracting 1159 Mm3 and using 348 Mm3 of gassy mines with methane each year (CCN 11 June 2007). Many of the gas financial assistance from drainage systems are operating at low efficiency and government extracting gas in the explosive range which is dangerous and bad practice. The positive initiative of installing gas drainage now needs to be followed up by a drive to raise standards which will result in a significant improvement in safety Minimum of 200,000 A deterrent for mine owners, but not sufficiently strong to be yuan compensation effective in preventing dangerous mining operations. Where payable by mine owner local small mine owners flee after an accident, local to families of fatal government is left to pay the compensation, a subsidy to accident victims illegal mining. Mine owners should be required to lodge a bond with government to cover such eventualities Regulations limiting Some local and consolidated small mines using semi numbers of miners per mechanized longwall mining methods have been unable to shift to encourage produce to their approved capacity. However, new, mechanization and deter consolidated and transformed local mines are starting to over-production from install mechanized longwalls. This is creating unemployment TVCM (Introduced by problems in some local communities and hence resistance to Provincial Government compliance and SAWS in Shanxi in November 2006) 77 Safety, health and community impact Factor Comment Awards to mine Prestige and peer recognition of achievement is important to management for directors of KSOCM. The impact on safety at KSOCM is by increased efficiency by reducing numbers of miners at risk, but it also engenders achieving planned coal competition between mines and therefore promotes production from fewer increased efficiency. longwalls Placing responsibility on A relatively new process so the effectiveness cannot be large mines in key judged but it should help reinforce the higher safety coalfield areas for the standards of the KSOCM in the smaller mines. However, a acquisition, side effect will be that it provides KSOCM with a lever to transformation and reduce competition with local mines. Thus, economic consolidation of small efficiency might suffer but not safety, so it is not an optimum mines solution for sustainable development. Overseas study tours to Raises awareness and creates opportunities to develop long visit coal mines and mine term information exchange ties. However, language safety institutions and difficulties will limit the benefits agencies Bilateral safety training These provide training for trainers to ensure a multiplier effect programs implemented in in the dissemination of new ideas and examples of China (e.g., US Dept of successful experience from overseas. Workplace risk Labor, New Zealand assessment and the concept of worker safety representatives Trade Unions) have been introduced. Both of these approaches have proved effective elsewhere but no major uptake among the KSOCM is yet apparent. It will be some time before the culture of management in verticals can be overcome. Aid agency and Until recently, safety related projects did not fit easily into aid development bank mine program categories. Current activity is mainly aimed at safety-related projects improving safety in small mines and dealing with poverty (ADB, UNDP) issues arising from closures. Closure of illegal and Due to low levels of investment, poor technical abilities of hazardous small coal owners and operators and the incentive to maximize mines production due to strong prices, these mines contributed significantly to high fatality rates so closures result in real improvements in safety Severe penalties for The Government is committed to combating corrupt practices corruption and awards severe penalties. Local government officials have been instructed to withdraw from any mining interests to remove the incentive to collude in allowing illegal mining operations to continue. Obstructing safety procedures is also looked on severely. For example, the former chief of the technology and equipment department of the Shanxi Provincial Coal Mine Safety Supervision Administration, was sentenced to 13 years in prison for taking bribes totaling more than one million yuan (about US$126,000) between 2001 and 2004 in exchange for assistance in passing safety examinations and assessments (Xinhua, 12 Nov 2006). Appointment of worker China has made a first attempt at involving workers in safety inspectors and accident prevention. Empowering workers to be involved in introduction of risk determining the safety of their methods of working is the assessment procedures "missing link" which differentiates safety management in China's coal mines with those in the industrialized countries. Future effort must be concentrated in this area. 78 Safety, health and community impact 5.2 Health of mineworkers China's workers in all industries reported suffering from various stages of lung a total of 12,212 cases of occupational disease and there were 12,000 new illness in 2005, according to a report cases in KSOCM in 2005 (some reports jointly published by the Ministry of state 5,000 new cases of Health, the State Administration of Work pneumoconiosis are reported annually). Safety and the All China Federation of Around 60,000 new cases occur Trade Unions in April 2006. No annually in SOCM and TCVM. In reality, comparable figures for the preceding the incidence could be much higher as year were given. Pneumoconiosis data on itinerant worker health is scant. (including silicosis) was the most common occupational illness reported According to a recent report by SAWS and accounted for 9,173 cases or 75 chronic lung diseases kill between 6,000 percent of all cases. The coal industry and 8,000 workers annually (presumably was the source of most of the new mostly coal workers given the higher cases, a total of 4,477 cases or 49 exposure). By 2005 more than 600,000 percent (China Labor Bulletin 30 June cases had been reported and of these 2006, Ministry of Health 24 April 2006). more than 140,000 have died, a death rate of over 20 percent. Only 50 percent The overall cost of occupational of miners take health checks. The many illnesses and work-related injuries in rural migrant workers working in the China has been estimated at 100 billion industry, especially in the small mines, yuan (US$12.5 billion) in direct losses are ignorant of health care and fail to every year (China Labor Bulletin, July 21 seek and get treatment if affected. They 2006). are unlikely to be able to claim compensation as few have employment Health issues receive less attention than contracts. A worrying feature is that an safety in coal mines, although official release by SAWS in April 2007 substantially more workers are affected on such a major topic of concern quotes by chronic disease than are killed in only 2005 data. There is an urgent need accidents. Occupational diseases for more detailed and up-to-date caused by high levels of mining dust and statistics to raise the profile of this major other toxic substances, unhealthy health issue. working conditions are seriously threatening the health and lives of Due to confusing and incomplete workers in China's mining industry. The statistics, the cost of treating and situation is exacerbated by inadequate compensating miners who have protective equipment and lack of proper developed pneumoconiosis is not known training in safety awareness and precisely. The Chinese Centre for procedures. The health impact in poorly Disease Control and Prevention ventilated, backward, labor intensive estimates the direct cost to be around 8 small mines is likely to be much greater billion yuan per year, with indirect than in the large mines which are economic losses of between 40 to 50 managed to higher standards. billion yuan. Assuming that the coal mining industry is responsible for about The most serious occupational health half of the pneumoconiosis cases, the problem in the coal mining industry annual direct costs of treating and arises from exposure of the underground compensating workers who have workforce to excessive concentrations of developed pneumoconiosis from respirable dust. Dust exposure can working in Chinese coal mines is likely cause pneumoconiosis, a disease that to be around 4 billion yuan, with indirect accounts for 73 percent of health economic losses of between 20 and 25 ailments reported in the industry. Some billion yuan. Another estimate, based on 300,000 coal miners at KSOCM are 0.3 million cases in KSOCM and a 79 Safety, health and community impact treatment cost of 30,000 yuan per for prevention, protection, supervision, patient, suggests a direct cost of 9 billion inspection and treatment but they are yuan attributable to KSOCM alone (Prof neither implemented nor enforced, other Zhou, CUMT) than superficially. Some attempt is made in KSOCM, but most TVCM are These are very significant costs, which probably totally ignorant of both the could be as high as 9.5 yuan/t of coal effects of dust on workers health and mined, for a disease which has largely protection measures that can be taken. been eradicated in the coal industries of The cost of prevention is likely to be the developed countries. In addition, the much lower than the treatment of the health problem could be much more impact of dust. Preventative measures severe than this as it is quite possible would involve investment in dust that there is an additional underlying suppression technology such as problem relating to other lung diseases extraction drums on longwall face such as chronic bronchitis and machines, use of effective conical emphysema not yet quantified. sprays behind every cutting pick on coalface and heading machines (pick- Although the information available back flushing should be adopted as regarding lung diseases in the Chinese opposed to the current pick-face flushing coal mines is imperfect because the to additionally provide frictional ignition statistics for pneumoconiosis, silicosis protection), use of dust suppression and other lung diseases appear to be sprays on conveyors, and provision of aggregated and incomplete, there is little personal dust protection equipment for doubt that a significant and growing miners. These measures would need problem remains to be solved. If not, it support from reliable dust monitoring, will lead to a serious legacy of ill health, enforcement of dust exposure premature deaths and possible claims standards, training for workers in self- for significant individual compensation protection, dust minimization, and use of payments. The effect of introducing any dust control technology. Regular health changes to improve dust protection and screening would ensure that the first prevention in China's coal mines will not signs of disease are recognized and be seen for some time and the costs of immediately treated. dealing with the disease will continue to rise in the meantime. The cost of such measures and precautions could amount to less than 5 Occupational disease prevention yuan/t. This is around one half of the Occupational disease prevention does direct and indirect cost of lung disease not receive the same level of attention caused by coal mining of 9.5 yuan per as accident prevention in coal mines, tonne. However, the adoption of these although it affects a larger number of measures would still result in a cost workers. Respirable dust prevention in increase to the coal mining industry as, coal mines is weak with many mines at present, the Government is absorbing exceeding dust control standards on most of the medical and disease coalfaces with lax enforcement. Some compensation costs. mines do not undertake any dust prevention supervision measures and A National Coal Health and Safety Fund many KSOCM mined areas do not have has been established. The proceeds of an occupational disease prevention the fund will be used to develop medical institute. Very few coal mines below the services to treat dust induced pulmonary regional and city administrative level disease. Several institutes and Hospitals have any professional guidance on have been designated to treat dust occupational disease prevention. induced pulmonary disease. But further efforts are required to tackling of a Laws and regulations exist which define massive problem. legal liability and specify requirements 80 Safety, health and community impact There is insufficient investment in independent inspectors, but also to occupational disease prevention in reduce their liabilities to potentially China and therefore protection massive legal claims from affected measures are not being implemented. A workers. The latter is an effective major reason why investment is incentive for companies to take due care insufficient is that mining companies are in protecting their workers. A problem in not bearing the full costs of occupational China, which would also lead to diseases. Developed mining countries inadequate investment in occupational take dust prevention in coal mines very disease prevention in China, may be seriously, not only to protect the workers that it is more difficult for workers to or because of stringent enforcement by obtain compensation through the courts. 5.3 Labor and social security A sustainable coal mining sector must An overall improvement in the coal be able to recruit, train and retain staff mining business in recent years has with a wide range of skills and expertise. been accompanied by large increases in In addition, government should ensure average wages. By the end of 2005 that they are adequately protected by there were 2662417 fully employed staff insurance to ensure that no additional and workers in KSOCM nationwide. In burden is created for society or 2005, the average wage of the fully government that should be borne by employed staff and workers was 1,816 mining operations. The communities yuan per month, an increase of 476 which develop around mines and yuan per month over the previous year, become reliant on their economies must a substantial increase of 35.5 percent also be protected by government when (Table 5.8). Moreover, average wages the mined resources become exhausted almost trebled over the period 2000 to and then communities helped to adjust 2005; a very large increase in real to the reduced economic opportunities. wages. In addition, miners in KSOCM now have pension, injury and health Remuneration of employees of key insurance schemes to which the state-owned coal mines employer contributes. Employment conditions have therefore improved considerably. Table 5.8 Average monthly salary in Key State-owned Coal Mines Year Employee's average salary (yuan/month) 2005 1816 2004 1340 2003 1122 2002 953 2001 812 2000 683 Source: China Coal Industry Yearbook, Coal Information Comparative coal mining enterprise higher the average skills required by an salaries industry, the higher will be the wages But the salaries are still too low to attract rates. Only salaries in the machinery the increasing number of skilled staff manufacturing sector were lower than and management that are required in coal miners, reflecting a higher moder mining operations to compete preponderance of low skilled workers, with other modernizing industries. The and then only by 8 percent. Recent 81 Safety, health and community impact statistics show that average mine worker little insight and it is likely that the low salaries have still not reached 2004 average is due to the large number of levels in the power sector (Table 5.9). low paid itinerant workers in the coal However, comparisons of averages offer mines. Table 5.9 Monthly salaries in China's coal and power sectors Applicable dates Sector Monthly pay (yuan) 2004 Power 3,300 (US$429) 2004 Coal 1,340 (US$174) August 2005 KSOCM 1,595 (US$207) Jan-Sept 2006 KSOCM 1,959 (US$254) Source: China Coal Industry Yearbook, Coal Information According to data from the World Coal China's Safety Production Law Industry Development Report, in the prescribes that production and business early 1980s, the salary of U.S. coal mine operation entities must cover the workers was 26 percent higher than the employment injury insurances according workers in the manufacturing sector and to law, and pay insurance premiums for by the mid 1990s salaries of coal mine their employees. Employment contracts workers were among the highest in should include stipulations regarding industry. The US coal industry is very labor safety guarantees, the avoidance different to the coal Chinese industry. It of vocational injuries and the provision of is a very capital intensive industry and employment injury insurance. Labor productivity per worker (measured as contracts are at a transition stage and GDP per worker) in the coal industry is some mines have yet to sign contracts very high. Similarly, the income of coal with their employees establishing their miners in Australia are far in excess of rights to health and injury insurance and workers in other industries. The average initiating the keeping of health records. weekly earnings for Australian full time workers in 2005 were US$910 and that There is no insurance or social of a mineworker was US$1,582 protection for itinerant workers. This, (Australian Bureau of Statistics). combined with the poor underground Therefore, a worker in the coal mining conditions in which many work, is sector earned, on average, 74 percent leading to a serious and growing social higher wages than workers in other problem of how to treat the large sectors. With the current skills shortage numbers likely to be affected by in the mining sector, this discrepancy is pneumoconiosis and other dust-related likely to be even higher. disease. Of those relatively few migrant workers that have signed employment A shortage of both mining graduates and contracts with KSOCM, most leave and experienced coal mining engineers has return to their homes before the serious elevated salaries in Australia and a effects of the disease are manifested. similar phenomenon is occurring within the leading coal mining enterprises in Accident insurance: Shanxi provincial China, but probably not of sufficient coal industry bureau initiated a unified scale to significantly increase average accident insurance scheme in August salaries across the sector. China's coal 2004 in which all the 11 large coal mines will need to raise miner's salaries mining enterprises in the province substantially to attract and keep a skilled participate. Accident insurance workforce capable of improving safety, premiums in 2007 were 120 yuan per technical and efficiency standards and to person each year for KSOCM and 300 facilitate industry wide mechanization. yuan per person in other mines to reflect the higher risk. The rates are set by Insurance protection for workers government. 82 Safety, health and community impact The accident insurance premiums in the insurance and health protection Australian coal mines are proportionally afforded to mineworkers in Australia is much higher relative to salaries (7 shown in Box 5.6. An important percent) compared with those in China's difference in Australia is that premiums KSOCM (0.4 percent) and compensation are related to the claims history of the is mainly for minor accidents rather than mining company, thus providing a fatalities. Insurance costs are likely to financial incentive to reduce frequency rise in China as the rights of miners and severity of accidents. become strengthened. An example of Box 5.6. Insurance protection for mineworkers in Australia The NSW coal industry provides financial support to Coal Services Pty Limited for workers' compensation insurance, occupational health services and mines rescue services. There were around 1,900 new workers' compensation claims in the NSW coal industry in 2004/5, a reduction of 10 percent on the previous year. A total of A$69 million was paid to injured workers in that year. The majority of claims (50 percent) related to back, head/neck and shoulder/arm injuries. Of these 61 percent were caused from strains and sprains and 29 percent of the claims were attributed to "slips and falls". It is mandatory for a coal mining company to use this insurance scheme and each pays a premium, based largely on the company's claim history. The rate is a percentage of the salaries of the workforce. In 2005 - 2006, this figure was 7.3 percent of a company's payroll. The cost to a mining company of insuring one of its workers is quoted at A$6,637 per employee. Coal Services Pty Ltd also provides pre-employment medical checks, routine health assessments, drug and alcohol screenings and lung function testing. Endowment insurance pensions: Mining number of employees using the "lowest companies are now using insurance guarantee" policy was 0.41 million, and companies to meet miner's pension total funds of 88.98 million yuan were in obligations. In the past, enterprises had place. made inadequate internal arrangements for funding pensions causing difficulties This level of social security did not to company and retirees. Insurance risk extend to small mines and no similar assessment is not fully matured and level of protection is available to workers premiums may not reflect life and families affected by the current large expectancy among miners due to the number of small mine closures. harsh working environment and high probability of occupational disease. Unemployment insurance: Large coal mining enterprises pay an Minimum income guarantee: To ensure unemployment insurance premium social and political stability during reform based on 2 percent of the total salary of the KSOCM, re-deployment and and an individual employee pays 1 minimum income schemes were percent of the total. Unemployed introduced. In 2001, 55 KSOCM raised workers who terminate their work funds of 752 million yuan for nearly 0.3 contracts and sign an agreement with million laid-off workers who were the "re-employment centre" receive 1/3 registered in "re-employment centers." of living expenses and social insurance, At the same time, employees and but seemingly little chance of a new job. employee's relatives with special However, the enterprises also have to difficulties were guaranteed a minimum provide living subsidies or assistance income. By June 2002, the registered 83 Safety, health and community impact money to those laid-off workers who private investment, rejuvenation of have not signed the agreement. agriculture and livestock businesses, reform of urban administrative divisions, Policy on coal mine closure and and construction of new housing stock. bankruptcy Enterprise zones and high-technology In 2000, detailed provisions were made R&D provide a basis for creating new for bankrupting of poorly performing and wealth and employment. The important exhausted KSOCM previously kept open message is to ensure that future coal for social reasons. This attempt to mining development is carried out under remove the tail-end of loss-making coal a broader economic basis to forestall the mines was an important reform step social and economic problems and costs which has established principles and that can accompany coal mine closure in policy that can be applied to future coal-rich areas. exhausted mines. However, the implementation process was to some There is no social security safety net for extent flawed. miners affected by SCM closures. Recent closures of some 1,200 small In 1999, 593 mines operated by 94 mines in Shanxi province led to around KSOCM were investigated by the 60,000 worker redundancies, which Government and 257 shafts were found mainly affected small villages. After to be either exhausted, mining polluting closure of the coal mines, about 10 high ash and high sulfur coal or unlikely percent of the workers were reemployed to be profitable. The total production and the remainder returned to their capacity of those coal mines was 100 Mt villages. In one particular city, 10,000 and their actual output in 1998 was 63.2 miners out of a total of 90,000 lost their Mt. They had 0.797 million employees jobs when the city government closed and 0.47 million retirees, total assets of 209 small coal mines from 2001 to 2005. 3.45 billion yuan and total liabilities of Most of the redundant miners had no 31.9 billion yuan. By 2002 most of these social security or limited employment unprofitable large mines had been skills, as educational levels were closed. generally no higher than senior middle school. Most returned to their villages The expenses for closure and with no income and little hope for the bankruptcy of exhausted coal mines future. Only a few of the redundant mainly consist of liquidation expenses; workers had graduated from technical site maintenance fee costs and schools or college and a small minority employee's living expenses during the were professional or technical liquidation period; the settlement fee for personnel. employees; pension and medical Social impact of coal mine expenses for retirees; injury and development occupational health expenses and compensation; expenses for social The social impact of new, extended and services such as schools, medical care, transformed coal mines and the growth and housing stock; and salary and of dependent communities have not pension. been studied in detail in China, neither are all the issues recognized by the Restructuring of the coal mining sector Government. New mine sites are and closure and bankruptcy of designed and constructed according to a exhausted and loss making mines had detailed plan, but as the mine undergoes an impact on the older, industrialized development changes are made which parts of China, especially the northeast, are less well planned. Living and social where local economies relied heavily on arrangements are invariably coal mining. Central Government led incorporated within the mine's footprint strategies have been developed to which is convenient for work and encourage diversification of industry, ensures that a similar standard of 84 Safety, health and community impact management is applied to both the reserves may leave nothing but a operational mine and the site as a ravaged landscape due to inadequate whole. However, large areas of land planning and development controls and become occupied by permanent there is often no alternative source of buildings, many of which will become a primary wealth creation to sustain the liability when resources are exhausted community. The impact of the mine is and the mine closes. such that agricultural land is lost due to Outside of the formal coal mine's building development and rural job skills residential and social facilities, buildings are lost. More data is needed to quantify of variable quality, including private such impact. dwellings, services, commercial enterprises and small-scale factories, Shorter mine lives would lead to an are built or adapted and the overall increased rate of mine closures. This economic standing of the area improves. can be catered for financially with bonds But, hygiene conditions are often poor, to cover restoration costs- and perhaps public services inadequate and solid also by incorporating retraining and waste disposal often involves redevelopment schemes. Permanent indiscriminate discharge into water mine buildings can be re-developed as courses which are also polluted by raw workshops or factories, but locations are sewage. Examples of this are evident often not suitable. There is experience of around Sihe mine in Shanxi. this type of redevelopment in Eastern Europe, but a preferred approach is to A major concern may arise where there reduce the scale and permanence of is a level of economic dependency of the surface infrastructure to a more surrounding community on the mine. temporary arrangement ­ similar to Mine closure after exhaustion of the Australian practice. 5.4 Reform needs Mine safety accidents. Further reductions require There is no simple solution for improving input from the individuals at risk. There safety performance. It is not just funds is an absence of safety culture and a that are required but also technical failure to convince individuals of their expertise, integration of international collective safety responsibilities in the effort, a massive training and re- work place. Coal mine safety training education program, effective and programs have been implemented to suitably empowered safety inspectors ensure all management and personnel and strong, responsible leadership from are certified on paper but the content of mine management. A mass of safety the courses, training and assessment regulations have been enacted to methods are not delivering the required protect mine workers, but they are not result. Stronger enforcement is an being applied effectively or enforced with essential ingredient to improved safety sufficient rigor as revealed by the rate of but the regulations being enforced need fatal accident statistics. to be practical, relevant and effective. The prescriptive safety legislation is a A few of the large mining enterprises limiting factor and lessons could be have demonstrated that a zero fatality learned by examining the successful target is realistic, but government performance-based approaches continues to set and accept higher introduced in developed mining targets which would not be condoned in countries. Improvements in technology, any developed mining country. equipment, regulations and standards have resulted in a reduction of 85 Safety, health and community impact Nevertheless, positive steps are being Too little attention is given to protecting made towards safer coal mines. Central coal mine workers from dust exposure Government pressure on coal mines to and resultant debilitating respiratory adhere to safety principles has been diseases. Due to incomplete health increased and, most importantly, mine screening of miners, the full scale of the inspections are becoming less focused problem is unknown. The limited on checking paper work and more on available information shows that it is underground technical examinations. likely to be massive with more than 12,000 new cases reported annually and There has been widespread adoption of many more unreported cases among methane drainage for gassy mines, migrant workers from the TVCM. mandatory in many provinces, but standards and performance are low in Social protection for mine workers many. The next step is to raise gas capture standards and increase gas All coal mines are required by law to quantities both extracted and utilized. provide health, as well as accident and retirement cover for their permanent A greater understanding of the workers. However, many mine owners underlying causes of fatal accidents are avoiding this obligation by employing would be obtained by gathering workers on temporary, short-term information on a wider range of contracts particularly at the small mines. hazardous occurrence and on non-fatal serious and non serious accidents. A Social impact of mine development wider range of mine safety statistics and China's large mine surface installations indices are formulated in Australia than occupy too large a footprint and the China which provides a fuller insight into resources used in their construction are the scope of accidents, their severity too costly. Development of commercial and implications for productivity and services and support industries around mining costs. The impact of many non- new coal mine sites need to be better fatal accidents on the business, and on planned and regulated to raise the living society, can equal those of a fatality. An standards of the surrounding increased awareness by mine community, expand the local economy management, workers and the public will beyond reliance on mining and protect bring important social pressure to bear the environment. It is a weakness in on seeking improvements. More serious China that constructional development is attention to non-fatal accidents will help invariably well advanced before local to establish a safety culture that will institutional infrastructure is established. result in fewer fatalities and multiple However, often this occurs too late to fatality accidents. establish and exercise robust development controls. Occupational health 5.5 Recommendations Improving mine worker safety through inspection, risk-assessment and The Government has achieved design of safe working practices. While considerable success in improving miners have the right to refuse to work safety standards at coal mines. The where dangers are evident, they have approach has been predominantly top- insufficient empowerment, protection down. Further safety improvements are and training to be effective. Workers in impeded by the lack of worker some small mines in China have been involvement in accident prevention subject to intimidating tactics for refusing to go underground when hazardous 86 Safety, health and community impact conditions have been encountered, but gas capture systems, many of which are the extent of this problem is not known. performing inadequately. The Government of China has taken the The Government should set a zero first step towards involving workers in fatality tolerance target for all mining accident prevention with the decision in enterprises and publish annual statistics May 2005 to appoint 100,000 worker showing safety performances, including safety supervisors or inspectors. These non-fatal accidents as this would provide worker safety inspectors must be a fuller insight into the wide range of suitably trained and authorized to carry accidents, their severity and causes. out inspections on behalf of fellow More serious attention to non-fatal workers and represent them to accidents will help to establish a safety management. The most effective culture that will result in fewer fatalities systems in other countries are those and multiple fatality accidents. where the workforce themselves appoint their own worker safety inspector Investigations of all major coal mine (Feickert 2007). In Australia and New accidents should be completed and a Zealand, independent trade unions report openly published as soon as provide an effective means of balancing possible, or within one year of the management authority and miners rights incident. This would ensure that lessons resulting in a safety record significantly are learned. This will allow the public better than in the USA where not all and mine workers become better mines are unionized. All of China's coal equipped to recognize bad practice and mining enterprises should be required to thus bring social pressure to bear on train and empower selected miners as irresponsible companies and officials. worker inspectors to use their Reports will also educate mine knowledge of the workplace to ensure its management, miner's families, mining safety. This approach has been equipment suppliers, mining contractors, successful in many other countries and government officials, training institutes would represent an extremely positive and the public in the key safety issues advance if introduced in mines of all type and help to raise safety culture in China. awareness across the sector. Mine management, mine staff and students in Enforcement of safety standards at coal teaching and training institutions would mines in China should be strengthened increase their understanding of accident with regular underground inspections of causes and contribute to innovation in working areas made by experienced and safer working practices if provided free qualified SACMS inspectors. These access to detailed accident reports and inspectors should have the power to data. suspend, if judged necessary, coal production without reference to higher China's coal mining enterprises could authority until identified problems are internally drive for higher safety rectified and to impose punitive fines for standards and raise their corporate specified safety contraventions. credibility in the market place as "safety committed" by introducing international, Gas explosions are a major concern and certified safety management systems. the Government has invested There is no pressure or perceived considerable effort and funds in benefit to adopt these systems in a introducing gas drainage and increasing demand driven market unless the ventilation standards in coal mines. consumer or regulator demands them as However, more should be done to a condition, or if the company wishes to remove potential ignition sources. establish itself as a global mining Training and knowledge transfer is enterprise. However, reputation is needed to improve the effectiveness of perceived as being very important to state-owned enterprise management, so 87 Safety, health and community impact once introduced safety management report to the production manager systems could proliferate rapidly. who has a legal duty to ensure that dust standards are met). Improving health protection of · Training of production mineworkers managers, officials, engineers Dust measurement and protection and dust control staff in the standards should be enforced through science of dust creation and regulations at all coal mines, and mining suppression. operations that are not in compliance · Workers and staff need to know with dust standards should be required about the circumstances in to implement dust control measures and which masks should be worn, demonstrate compliance within three how they should be worn, how months or face suspension of the mining they should be cleaned and face until specified improvements are serviced and the benefits of made. Any attempt to continue using them. production after suspension should be · Procurement staff must be treated with severity. capable of specifying the most appropriate dust control SACMS and MOH should organize and equipment for particular implement health screening for all machines, given the conditions mineworkers paid for by the coal mines. in which it is to be working. Annual mineworker health statistics · The importance of ventilation for should be published to make the coal dust dilution must be understood mining sector aware of the scale of the by all employees and managers. problem and to enable society, · Mine safety inspectors should be government and coal mine management fully trained in dust control to monitor the effectiveness of dust techniques and should have the protection, control measures and authority to suspend mining enforcement of the regulations. As coal operations and/or direct that mines will be expected to meet the costs improvements are made urgently of treating and compensating afflicted where necessary. miners in a sustainable coal mining sector, the alternative of investing in National guidance on modern dust prevention would be the lower cost prevention, protection and control option. measures should be prepared and a national program of training In particular, the following dust implemented for coal mine officials and precautions should be adopted: management. · The introduction of maximum Improved employment conditions for permitted dust levels that are miners based on a proper assessment Regulations require workers in all sizes of health risks. of coal mine to be offered fair and · Training of separate dust control equitable contracts that include health and dust monitoring staff. These and accident insurance and retirement positions should report directly to pensions. Permanent workers in top management and have the KSOCM are already covered by these authority to make changes or pensions. The issue is whether itinerant prohibit certain activities. or casual workers should also be given · The dust control staff should not the same full range of benefits. If this be under the direct control of were enforced, there would be a managers responsible for coal significant increase in the cost of labor production so as to remove that would have an impact on the potential conflicts of interest. viability of many coal mines. This could (Alternatively, these staff could 88 Safety, health and community impact cause many mines to close and other general pension fund or workers could more viable mines to seek to reduce be allowed to cash out benefits. their workforces through mechanization. The result may be a significant increase Sustainability of mining communities in unemployment in regions where there are few alternatives sources of Proposals for new mining projects could employment. If wages are set artificially take account of how the land and high in the industry this will not be in the facilities could be used after eventual interests of the development of a closure and included in a rehabilitation sustainable coal industry. plan. A scheme should be devised which will Funds could be made available for permit both permanent and temporary encouraging new businesses ­ such as workers to maintain pension micro-credit schemes ­ and this should contributions across employers. There is be done while the mine is operational no need for this in the case of insurance and not purely as a response to closure. as each company would be required to Social development should be separate cover all workers while they are working from the mine, but properly controlled by in the industry. Pension contributions the local government while keeping in could be paid into an industry wide or mind the needs of living conditions. 89 Environmental impact Chapter 6 Environmental impact 6.1 Current status Surface and underground mining rivers. In Shanxi, Shaanxi, Inner activities damage the environment, and Mongolia, and Ningxia regions the economic value of land resources, groundwater level has been lowered by causing subsidence, soil erosion, substantially in areas of extensive slope instability, reductions in water mining. availability, desertification and pollution of land and water resources with solid Coal waste and liquid mine wastes. Land which is occupied by mine waste-tips results in The output of coal waste from leaching which causes surface and underground coal mines in China is groundwater pollution. Almost 90 huge, accounting for 8 percent to 10 percent of China's coal resources occur percent of the raw coal production and in continental drought and semi-drought waste-tips occupy large areas of land. areas. This accumulation prevents any constructive use of the ground and Gaseous waste by-products of mining allows leaching of hazardous trace include greenhouse gas emissions in the elements which cause severe soil form of methane and also oxides of pollution. Waste-tip fires create hazards sulfur and carbon from waste-tips, and cause air pollution. At one site especially where spontaneous visited in Shanxi, the mine waste combustion is occurring. Solid wastes material was reported to contain 15 from coal mining consist mainly of percent coal and the tip, not surprisingly, siliceous rock, carboniferous shale and was on fire. The incidence of polluting poor quality coal that are rejected in the fires and the waste of coal could be washing process. The underground reduced by more, and improved, coal mining methods employed in China washing. This would result in the generally involve more rock drivages additional benefits of increased resource than those used in western countries recovery efficiency, more clean coal and where labor costs are higher. Therefore a new revenue stream. Such activity more rock is mined and disposed of as would make commercial sense once the waste than in most western coal mines. marginal cost of mining (including environmental costs) exceeds the Mine water washing cost. In northern China, high volume water Outcrop fires flows from underground karst features into deep mine workings can cause a Large areas of shallow coal outcropping rapid decline in groundwater resources on hillsides have been destroyed by leading to the drying out of springs and spontaneous combustion. These are thought to have originated as natural 90 Environmental impact occurrences exacerbated by than 65 percent above the present level uncontrolled shallow mining which has to represent over one half of global coal allowed oxygen to infiltrate deeper into mining emissions by 2020 due to the seams. Major occurrences have increases in coal production (ESMAP been recorded and mapped in Ningxia, 2007). Through its ratification of the Inner Mongolia and Xinjiang. As a result Kyoto Protocol, China is committed to large amounts of coal are being lost and achieving reductions in emissions of major greenhouse and other noxious greenhouse gases, even if it is not gas emissions are being generated. obliged to set caps. Government policy Since 1993 joint Chinese and is to encourage coal mines to utilize international studies have charted the drained gas and as a result schemes extent of these occurrences using involving CMM power generation and satellite and aerial surveys, and local direct gas use have been constructed fire-fighting teams have been (ESMAP 2007). The increase in the established in some areas. Estimates of volumes of CMM vented to atmosphere combusted coal vary widely from 20 could be reduced further by improving Mtpa to 200 Mtpa (Krajik K, 2005). capture, utilization and destruction of the Treatments to date have only met with gas at coal mines. The clean limited success. These fires are a major development mechanism (CDM) is being source of greenhouse gas emissions used to finance projects that reduce which require concerted efforts to treat. CMM emissions, although more could However, the provisions of the current be done. Kyoto mechanisms are not easily applied, and in the absence of any At present there are no penalties in alternative, insufficient international and China for methane emissions from coal domestic assistance is being mobilized. mines, but MOEP has introduced a policy standard which prohibits venting Nevertheless, the Xinjiang Government of drained gas (where methane is making a determined effort and has concentration >30 percent) which must pledged to extinguish all of its coal seam be flared if it cannot be used (SEPA fires by 2015, ahead of its 2020 2007, MOEP 2008). This policy deadline, thus saving about 24 Mt of represents an important contribution to coal. In November 2007, a 50-year-old reducing China's greenhouse gas coal seam fire was finally extinguished emissions in line with a World Bank which had consumed more than 12 Mt of recommendation (ESMAP, 2007). A coal (Xinhua, 21 Nov 2007). weakness of the policy is that no incentive is provided to encourage Coal mine methane emissions mines with poor gas drainage that are China's coal mining sector is a major extracting methane at low and global emitter of greenhouse gases. hazardous concentrations to improve Methane, a major greenhouse gas, is performance. By raising gas drainage released as a consequence of coal standards mines can increase gas mining and China's CMM emissions capture, improve gas quality, ensure represent 43 percent of global methane safer mining conditions and facilitate released by coal mining. Total amounts greater utilization and destruction of of CMM released will increase by more CMM. Table 6.1 Estimates of mining induced environmental impact Environmental impact Quantity Subsidence damaged land from which inhabitants 5,850 km2 have been permanently displaced Average surface subsidence from underground 0.2 hectare per 10,000t of coal coal mining mined Destruction and occupation of land by open cast 80 km2 per year 91 Environmental impact mines Ground water extracted from coal mines 2.2Bm3 per year Water cleaned and recycled 23% (other sources >40%) Mine waste 150 to 250 Mtpa Area occupied by waste tips 74km2 Total mine waste on surface 3.0-3.6Bt No. of coal waste tips at KSOCM 1,500 - 2600 No. of KSOCM coal waste tips with fires 389 (80 serious) (spontaneous combustion) Total methane released from coal mines (2004) 18 billion m3 CMM drained and vented to atmosphere (2004) 15Mt CO2 equivalent Ventilation air methane emitted to the atmosphere 244Mt CO2 equivalent (2004) from ESMAP 2007 Economic losses due to mining subsidence 15.3 billion yuan damage in Shanxi over past 20 years (domestic (approx US$2.0 billion) estimate) Economic losses caused by mine water discharge 30 billion yuan (approx US$3.9 in Shanxi (domestic estimate) billion) Source: China Coal Information Institute Subsidence impact of underground statistics on the overall extent and coal mining magnitude of this impact is available. After coal is extracted from a longwall the roof is allowed to cave. The removal Of China's provinces, Shanxi has of support causes surface subsidence, probably been the worst affected by coal the severity of which depends on various mining. Since 1948 an estimated 9,000 factors, including depth of working, Mt of coal has been extracted in the thickness of the coal extracted, width of province and is continuing at around 700 longwall panel, pillar sizes and strata Mt per year. Direct economic losses properties. Subsidence caused by inflicted by sinking of land equals 42 underground mining has damaged billion yuan. By 2005, over 5000 km2 of surface water courses, led to flooding of land had been under-mined, with around arable land, destabilized slopes, 2,940 km2 seriously affected by damaged surface transport infrastructure subsidence. The area of subsidence and has necessitated the relocation of created by longwall extraction is small village communities. The expanding by 94 km2 annually. Over the subsidence impact is most severe where years some 1,900 villages and 950,000 thick seams are extracted at shallow people have been affected by mining depth. subsidence, causing lowering of groundwater level, degrading of Occasionally, catastrophic surface farmland, failure of slopes and damage subsidence incidents occur as a result of to buildings and roads. Resettlement underground mining. On 24 October costs are significant. Relocation costs 2007 five houses in a residential part of are substantial but not excessive and Yangquan city, Shanxi province, presumably make economic sense to collapsed into a mine tunnel excavation. the mines. For example, Shanxi Coking 12 people were reported killed, with one Coal Group paid 31 million yuan (US$4 missing and two injured (Xinhua News million) to resettle 13 villages and 1,248 Agency). The report does not state households, an average of 24,800 yuan whether the fatalities and injured (US$3,200) per household. However, persons were miners or occupants of the these costs do not address loss in land damaged houses. Cracked and quality. damaged structures are fairly common sites in older coalfield areas, but no In March 2005, Shanxi Provincial Land and Resources Department investigated 92 Environmental impact the mining subsidence problem and and waste rock utilization, to grandiose devised a response to address the amenity schemes with golf courses, social and environmental impact luxury housing and commercial attributable to the KSOCM at a cost of development. Projects tend to be 8.9 billion yuan. The costs were to be piecemeal and more akin to met by the Central Government, local demonstrations than routine practice. governments, mining enterprises and Land restoration costs can include individuals with 40 percent coming from surveying, planning, design, site government sources. About 180,000 preparation, materials, transport and households with 600,000 inhabitants handling and project management, and were to be resettled. can vary significantly. The costs incurred in some mine restoration projects in Shanxi Coking Coal Group is Shandong province varied from 6 to 45 responsible for a cumulative area yuan per m2, but the extent of the areas affected by subsidence of 131 km2. In treated were small, ranging from 1.5 to dealing with its liability, the Group has 21 km2. already spent 88 million yuan (US$11.4m), but a further 46 million In general, most severe subsidence yuan (US$6.0m) is required to complete problems affecting land quality will occur the rehabilitation and compensation where there has been multiple seam program. These costs equate to about extraction. However, there will be some one million yuan per km2 or one yuan areas where the water table is close to per m2. This is a very low amount, the surface and even modest compared with other mines, and is due subsidence will lead to flooding and to much of the overlying land being severe loss of productive farming land. mountainous and sparsely populated. The cost not only depends on the Where subsidence affects farmland, severity of damage and the original land houses and roads, the mining company quality, but also on the quality of the is required to compensate the affected restoration. The spectrum of subsidence parties, or undertake reparations that compensation costs will therefore be are mutually agreed. For example, if very wide and a general compensation mining interrupts a farmer's water fee value will be totally inadequate in supply, the farmer is either compensated some instances. In many parts of or a new water supply system is Shanxi, for example, reparation mainly installed. The Shandong Land and involves solving water supply problems Resources Bureau specifies a for the small mountain villages affected subsidence fee of 1.0-2.0 yuan/t by longwall mining. The subsidence fee depending on the extent of subsidence. of typically 0.1-0.9 yuan/t paid by the mines is often too low to cover this as Mining enterprises are responsible for well as any localized subsidence dealing with subsidence issues. On a damage. day to day basis, mining enterprises address subsidence issues by leaving Subsidence fees should relate to coal pillars intact to protect sensitive anticipated restoration costs and will be surface features, restore subsided land, site specific. Site specific variations are or pay compensation for damage and evident in costs being paid currently by resettlement of villages before mining mines. For example, in a coalfield area beneath them. As the true costs are not studied in Shanxi, subsidence fee costs known, mines cannot optimize solutions. per tonne ranged from 0.81 yuan to 10.88 yuan. The higher costs of The costs of remediation vary depending subsidence are generally incurred where on the magnitude and type of impact. the depth of working is shallow and Restoration projects range from infilling seam extraction thickness is greatest. In subsidence areas with fly ash, one instance subsidence of 10 m was constructing water conservation projects 93 Environmental impact reported with fissures developing up to avoid and manage subsidence problems 600 mm in width. to minimize mining costs. Methods for reducing subsidence by increasing pillar The subsidence related issues identified sizes have implications for coal resource were: recovery and are a potential issue for which there is currently no regulatory · Extensive fissuring of land solution. A market system in which · Relocation of villages resource recovery rates are not · Landslips mandated, would allow mines to choose · Fault reactivation causing severe the least cost option which is likely to be structural damage the most economically efficient option. · Interruption to services (water and electricity) When mine owners are required to meet · Interruption of river flows the full costs of dealing with mining- · Desiccation of farm land induced damage to the land surface, · Destruction of aquifers and loss of they will pursue means of minimizing water resource impact to reduce costs. · Loss of crops · Environmental costs Failure to adequately repair highways causing public hazards Proper protection of the environment during mining and restoration after Although evidence of severe mining mining is a key element of sustainable damage could be found, it was highly development. The full range of localized. Most of the areas affected are environmental costs incurred as a result sparsely populated, the land is arid, soils of coal mining has been estimated in a mainly poor and the numbers of study in Shanxi Province (Institute of dwellings affected are relatively low. The Energy Economy, 2007). The results for overall impact on major infrastructure, KSOCM are summarized in Table 6.2. In highways, railway lines and motorways comparison, the actual environmental appears to be minimal. Where land costs paid by KSOCM in Shanxi are quality is not a major issue, the main shown in Table 6.3. The difference subsidence cost is mainly associated indicates a deficit of 41 yuan/t (US$5.3). with relocating villages. The density of However, observations made during a these, for example in the Datong field study suggest this cost data may be coalfield of Shanxi Province, ranges from 1 to 6 per 50 km2 (roughly 1 village too high. In practice, mines arrange and pay for restoration of village water for every 17 to 100 longwall panels). supplies. Aquifer damage is a consequence of mining and the Village relocation is less common in Government's permitting agencies developed countries compared to China decide whether it is an acceptable price due to local government planning for the energy. The water resource loss constraints, high costs and negative component in Table 6.3 can therefore be community reaction. In countries such justifiably removed. The high ecological as Australia with low population reparation and air pollution costs in densities such action may be rarely, if Table 6.3 are difficult to justify as ever, needed. In densely populated averages, as this impact tends to be countries, such as the UK, pillars of highly localized in Shanxi where a support are left or subsidence control substantial proportion of the province is measures are employed as the lowest mountainous with relatively low quality cost option. land. Reducing these figures to 30 percent of the stated values, a While government subsidence policies reasonable assumption, would give a and regulations have been adopted by combined cost of 8.2 yuan/t. The Chinese mine operators there seems to amended average environmental deficit be no standard guidance on how to 94 Environmental impact thus becomes 9 yuan/t (US$1.2/t), a developed in China and these results relatively low figure given the should be considered as preliminary. uncertainties of estimation. Actual costs Nevertheless, the use of the estimation will vary between mines and even method based on remedial and across different longwall panels in the restoration costs, is sound. The same mine. approach is also consistent with China's environmental laws which require the The methodologies for assigning polluter to meet the costs of treatment. environmental costs are not yet fully Table 6.2 Estimated costs of coal mining induced environmental damage in Shanxi, 2005 Impact Detail Total cost Average (Billion cost yuan) (yuan/t) Water resource Damage to aquifers, drinking water 7.2 13.0 loss supplies, surface water drainage and collection, and mitigation by provision of alternative supplies and storage Subsidence Subsidence damage to land, buildings 2.6 4.7 and relocation and infrastructure, and village and costs housing relocation costs Waste coal tips Waste coal disposal, land occupation, soil 2.9 5.3 and water pollution and spontaneous combustion impact and treatment Air pollution Damage to human health and crops from 4.1 7.4 airborne particulates and cleaning costs Water pollution Loss of water supplies due to pollution, 1.8 3.3 industrial waste water discharge control, drainage pollution Ecological Added cost for controlling soil erosion, 11.0 19.9 damage damage to vegetation and wetland ecological systems Total environmental cost incurred 29.6 53.6 Source: Institute of Energy Economy, Shanxi Academy of Social Science, 26 October 2007 Table 6.3 Actual environmental costs paid by KSOCM in Shanxi, 2005 Fee item Amount (yuan/t) Note Subsidence fee 0.1-0.9 Coal waste disposal 2 10 yuan/t of waste equates to 2 yuan/t of coal assuming 20% ash content Sustainable development fund 7-10 The 50% of payment intended for (environmental component) environmental protection is included here Land rehabilitation (1993 0.4-0.6 Rehabilitation of farmland regulation) Soil protection 0.5-0.8 (1993 regulation) Forest and vegetation (2-10yuan/m2) Sum depends on degree of restoration (2002 regulation) forestation and its protection 0.2 status. Amount/t estimated Forestation construction fund 0.2 95 Environmental impact (1993 regulation) Total environmental cost paid 12.6 Average by KSOCM Source: Institute of Energy Economy, Shanxi Academy of Social Science, 26 October 2007 The total external costs of coal mining not yet paid by KSOCM could therefore Until now, an environmental assessment amount to around US$1.2 yuan/t on has only been required for the mine average. However, there are likely to be construction project itself. In the future, some sensitive areas where costs are a broader environmental assessment is much higher and the fees will not match likely to be required by authorities. This the remedial costs. Application of includes requiring the mine complex to standard fees which are less than manage the whole of the mining remedial costs provides no incentive for activity's environmental impact. SEPA mines to lessen the impact. However, has asked its subsidiary organizations in where fees are too high, the mine is each province for their advice to make disadvantaged competitively. Fees tend an "Environmental Assessment Guide" to be based on provincial and regional for mine developments. regulatory standards and these should be replaced by performance standards The Shanxi Government is establishing relevant to local, site specific conditions a comprehensive coal mining to encourage mines to minimize impact compensation and environmental costs. Making mine owners pay the full rehabilitation system to demonstrate cost for environmental liabilities will how sustainable development can be encourage them to act more responsibly achieved and the Shanxi Government in the future. has allocated 2.3 billion yuan for restoration of vegetation and forestry in Actions to improve environmental mining areas. However, there is the protection need to further improve the institutional Environmental protection is considered and regulatory procedures to ensure that during the design, construction and the funds is used for the designated operation of coal mines, as with other purpose in an efficient and effective projects, to minimize pollution. The way.. projected environmental impact and management strategies are required to Land use, subsidence and other fees be included in the EIA for the project, but When a new mine is constructed, not mine closure issues. various fees relating to land use must be paid. These include: Comprehensive development policies can be designed to encourage more · a compensation fee to the efficient use of resources, use of waste former user of the land and the materials such as rock and coal waste local government; and recycling of water. Improved coal · a land use fee to the local processing can result in the recovery of government. Land use fees are more coal which is less polluting. It can 7-8 Y/m2 per year in coal also prevent spontaneous combustion in producing counties and up to 30 waste dumps and reduce the damage Y/m2 in coal producing caused by leaching of pollutants from prefectures; and waste dumps. There is a need for · a land construction fee for treatment of mine water emissions and developing new land to offset the tips in abandoned mining areas, but no land damaged by mining. clear management or financing mechanism exists to address these problems. 96 Environmental impact A discharge fee for coal waste of 5 Y/t Administration Law stipulate that mining has also been stipulated. enterprises should be responsible for the restoration of land damaged or polluted Land restoration rules and by their mining activities. Mining regulations enterprises can either undertake In 1998, the Government issued the restoration directly or pay a fee to a Land Restoration Rules (Rehabilitation restoration fund controlled by local Rules) which defined the responsibilities government. and liabilities of the authorities, mines and individuals on restoration of The funds for restoration of land and damaged land, as well specifying the resources damaged by mining are sources of funds. Coal mine land provided by the Central Government and restoration is managed by the various by local governments. These funds are administrative departments responsible financed by a range of fees levied on for land, water, power and mining enterprises by both levels of environmental protection. Determination government in addition to restoration of the extent of damage to the land fees. There are no set rules on how depends on whether the affected land much of this finance should be devoted loses its original function, whether it is to restoration. Some local governments recoverable and how many changes in stipulate that 20 percent to 40 percent of function have occurred. the funds collected should be used. It is probable that in some instances, none of Compensation for damage is based on the capital is used as prescribed and the changes of the land functions, rather hence a more transparent procedure is than on the reduction in the asset value needed. of the land, and also on the impact on the local community. There is no During the 11th Five Year Plan, Shanxi national valuation standard and hence Province plans to spend 7 billion yuan no uniformity in method. There is an dealing with the impact of coal mining, optimal finite amount that should be Anhui will spend 1.2 billion yuan and spent on land restoration and unless this Liaoning Fuxin will spend 0.8 billion is recognized, the situation could result yuan. These funds are mainly intended in millions of yuan being spent on for the resettlement of employees from restoring low value land that would be closed and bankrupted mines and from more socially valuable spent elsewhere. areas about to be under-mined and affected by subsidence. Private Local governments do not have the investment in rehabilitated land is capacity and skills to effectively monitor encouraged in return for usage rights. assessments and compensation. Donations from society and international Penalties for failing to take remedial aid funds are also encouraged. action or pay compensation are not sufficiently strict and can be overturned Different coal mining enterprises follow by the influence of the mine developers. different procedures for dealing with Due to the multiplicity of government environmental reparation. Clearer and departments involved, including land stricter regulations plus accountability to and resources, environmental government is needed, including protection, safety supervision, forestry provisions for long-term after-care. and agriculture, the administration system is costly and not very effective. According to the statistics gathered by Land and Resources departments only Restoration about 10 percent of mining land has been restored, of which an estimated 80 Based on the `polluter pays' principle, percent is associated with coal mining China's Land Restoration Rules, Mineral and that the standard of restoration is Resources Law, and Land relatively low. The main reason is the 97 Environmental impact historical legacy when the former state- Effectiveness of the EIA process owned mines did not undertake any environmental recovery or land The EIA process is well-defined and restoration. To promote the sale and failure to submit or comply with an EIA development of rehabilitated land, some can lead to fines from 50,000 yuan cities have introduced incentives, (US$6,500) to 200,000 yuan including reductions in or exemptions (US$26,000). For a large coal mine from, land taxes and charges. In project these sums are not significant. Shandong Province, the Government of The enforcement of the EIA process Jining City has established land instead comes from the requirement of restoration funds at city, county, and the NDRC for an approved EIA before district level to be devoted to the granting approval for construction. rehabilitation of land affected by coal mining. A special rotating fund has been The relatively low fixed fee for established for allocation on a project by undertaking an EIA limits the value and project basis. The rehabilitated depth of environmental impact studies. subsidence land will be sold on the The standard of charges for EIA market or open tenders invited from consulting was set in 2002, but since towns and villages. The amounts then the work load and requirements of collected from the sale of rehabilitated an EIA have increased. The land will be used to finance further environmental awareness of many rehabilitation projects. construction contractors is also weak and the environmental impact In the past, local governments required assessment is too often regarded by that coal mining enterprises acquire land developers as a rubber stamp process for coal mining first, and then conduct which does not need to be taken too land restoration after mining. Mining seriously. SEPA is seeking to correct enterprises therefore had to pay the this misguided view. farmland requisition fee up front and then later bear the expenses of land An important first step to encourage restoration. Once the coal has been public participation in the EIA process mined the enterprises have no incentive was announced on 22 February 2006 to rehabilitate the land and in many and made effective from 18 March 2006. cases, failed to set aside funds for SEPA issued a regulation clarifying the restoration. rights and obligations of the public, developers, and environmental groups in Coal mining companies in developed the EIA process. Five specific vehicles countries are generally required to lodge for public participation were outlined: a post closure restoration bond with the opinion surveys, consultations, coal managing authority before mining seminars, debates, and hearings. starts. This ensures that local Project developers and their advisors government is not saddled with ongoing are required to represent a broad range liabilities after cessation of mining or of regions, occupations, and expertise closure of coal mines. This is alternative when selecting individuals or groups to policy to a restoration fee has proved review their reports. The assessments successful. should also be clear, concise, and widely available to the public. However, At a national level, in recent years, observers have expressed concern that MOLAR has cooperated with related the proposed public comment period on organizations from UN, Japan, and USA EIA reports of only 10 days is too short in carrying out demonstration and and that exemptions for projects research projects on environmental deemed to be "state secrets" could be recovery and land restoration in mining abused by developers to avoid areas. publicizing their environmental responsibilities. It will be some time before public awareness on 98 Environmental impact opportunities for participation in subsidence issues. The measures will environmental activities will be raised be implemented through improved sufficiently to engage more than the planning, EIA procedures, supervision, relatively few (mainly academics and collection and governance of restoration experts) who are currently active. There funds and incorporation of is a role for NGOs in promoting public environmental reparation expenditure participation (Liu Lingling, China Watch, into mine operating costs. The details of Beijing, 24 Feb 2006). how this will be achieved are evolving from a pilot study in Shanxi Province. In comparison, in NSW, Australia The strategy does not explicitly mention (Appendix 5) there is wide stakeholder greenhouse gas emission reductions. involvement at all stages of mine project Although such reductions are seen as development. Mining companies provide beneficial, it is as a by-product of energy detailed information to government and projects and not as a priority under the public at all stages, not just a China's Kyoto Protocol obligations. detailed EIA. However, in supporting the views of the local populace, government The Government appears to have two in Australia arguably gives insufficient main standards for judging whether a weight to national and economic benefits project is compliant with China's and the potential of mining operations to sustainability development principles. limit long-term environmental impact. These are an environmental standard China cannot afford to adopt such rigid based on adherence to clean production procedures and needs to seek a more and a technical standard based on balanced approach. efficient use of coal resources. However, the Government places a broad Environment and sustainable interpretation on what it expects in terms development of a sustainable coal mining sector. The Government of China has In April 2007, the policy of coal established a sustainable development sustainable development was initiated in strategy for the coal mining sector which Shanxi. Under this policy all coal mining requires the introduction of, among enterprises are required to pay a fee others, policies to address calculated as the product of a coal environmental related issues. These category fee, a production capacity include comprehensive mining damage adjustment factor and raw coal compensation and restoration schemes, production. The categories and factors strengthened ecological and water are shown in Table 6.5. resource protection and improved governance of coal mining waste and Table 6.4 Fees and factors for calculating coal sustainable development fund contributions in Shanxi province Coal type Fee range for Capacity Scale Mine types Scale category ranges factor factor (yuan/t) (Mtpa) Anthracite 10-20 >0.90 1 KSOCM 1 Coking 15-20 0.45-0.90 1.5 LSOCM 1.5 Steam 5-15 <0.45 2 TVCM/SCM 2 The fees paid by KSOCM are divided of 6:2:2, and the fee is collected by the between provincial, municipal and local taxation bureau. The fund will be county governments where the coal used for environmental protection (50 mine is located in the proportion of 8:1:1. percent), transformation of coal resource Fees paid by other coal mines are cities (30 percent) and addressing social allocated similarly, but in the proportion 99 Environmental impact problems resulting from mining (20 competitive edge will be gained in percent). emerging economies by the adoption of lower environmental and safety Corporate social responsibility standards. Coal mining companies have an obligation to their shareholders (and China's first venture into the world government as a major shareholder in market with the Barapukuria coal mine the case of KSOCM) to maximize the and power plant projects in Bangladesh value produced by the assets they was beset with problems. The control. International coal mining geological, hydrological and mining companies operate stringent HSEC conditions were difficult and costs for the policies, work to internationally mine escalated from US$132 million to recognized sustainability criteria and US$239 million. The project started in demonstrate corporate responsibility by 1992, should have been completed by their actions. Corporate social 2001 but fell six years behind schedule. responsibility also extends to buyers and The initial production target was reduced users of products. Some of the major from 1.0 Mtpa to 0.5 Mtpa and three international manufacturing companies fatalities occurred during mine are expressing concern, driven by construction. Water extracted for the increasingly sensitive and aware neighboring power plant depressed the shareholders, about the life-cycle impact water table affecting water supplies to of their processes and products. Poor 15 villages around the coal mine area. labor practices have been targeted and International standards of environmental attention is now being given by some impact analysis and assessment do not international companies to assessing appear to have been applied by the climate change and human safety issues developer or enforced by the authorities. associated with energy supply on which As China is a recent starter in manufacturing and assembly depends. international coal mining, with little experience and a low chance of getting Building an international reputation the most favorable projects. Nevertheless, it should exercise Some large Chinese coal mining judgment and only undertake projects enterprises are amalgamating to form that it can complete responsibly in global scale companies, although only a accordance with good-practice few are taking a global perspective. To international standards otherwise become truly global operators they will opportunities for overseas development need to adopt international good will be limited. practice. Foreign governments and societies are concerned that a 6.2 Reform needs Failure to effectively enforce Environmentally-related fees tend to be environmental regulations to prevent standardized across provinces and excessive environment impact arises regions rather than designed to match where there is inadequate any site specific impact. Charging understanding of the implications of mining companies for the full costs mining by local governments, rapid imposed on the environment would give industrial growth, use of quick but them an incentive to take due care of the inefficient technology fixes, short-term environment. The solution lies in putting vision and weak governance. The in place standards for environmental environmental cost is excessive when impact and rehabilitation of mined areas. mining companies are not charged the Mining companies should have to meet full cost of their depletion of those performance standards, but environmental resources. should be free to choose the manner in 100 Environmental impact which they achieve them. This will how restoration projects will be designed encourage them to adopt the most and managed effectively by local efficient (least cost) approach. governments and the Central Government should monitor this In areas currently being mined, process. subsidence and restoration charges on coal production are sometimes too low Mitigation of mining related greenhouse to cover the costs of correcting the gas emissions is a major challenge for problem. Until recently the problem has China that requires attention at the been compounded by local governments highest level of government, otherwise diverting collected land compensation the sustainability of the energy sector fees to other uses in trying to balance will be undermined. Strong and urgent their budgets and to maintain measures needed to reduce these development growth. The advent of the emissions have been recommended by sustainable development fund in Shanxi the World Bank (ESMAP 2007) and offers a solution to meet the there are signs that these are being environmental and social impact of the heeded. coal industry, but concerns remain on 6.3 Policy recommendations Improving effectiveness of on the benefits of environmental environmental protection regulation protection. Suitable environmental protection laws and regulations are in place but are KSOCM pay a raft of environmentally often not strictly observed. SEPA and its related fees to government which, if lower level departments should take a spent on addressing the impact of more active role in inspecting major coal mining would, in many instances, cover mine exploration and construction a substantial proportion of the costs. A activities as well as investigating surface study in Shanxi Province on impact during operation where concerns environmental mitigation costs suggests have been raised in the EIA or when a possible average deficit in the range complaints have been made by affected US$5.3/t ­ US$1.2/t of coal mined. individuals or organizations. However, there will be some sensitive areas where costs are much higher and Higher fees should be allowed for the fees will not match the remedial environmental impact studies which are costs. Application of standard fees which undertaken by third party specialists to are less than remedial costs provide no facilitate more detailed site incentive for mines to lessen any impact investigations and the standards of EIAs and, in the cases where fees are too should be commensurately improved. high, mines are competitively disadvantaged. It is recommended that Failure to submit or comply with an EIA fee policies based on provincial and can lead to fines from US$6,500 ­ regional regulatory standards be US$26,000. This is a fairly significant replaced by performance standards fine for a small mine operator but not for relevant to local, site specific conditions a large mining enterprise and therefore to encourage mines to adjust their the fine should be determined in mining practices to minimize production proportion to the scale of the project. costs. Local government should receive a proportion of any environmental fines to The Government should reinforce encourage support of EPB activities and environmental fee policies by ensuring to finance local awareness campaigns that mines only incur fees relevant to their impact. This provides a driver to 101 Environmental impact reduce costs by seeking to identify and mining have a right to proper establish safer and less environmentally compensation for any loss or damage damaging mining practices. caused. This is recognized by governments in China already and there Climate change costs have not been are provisions in law relating to factored into China's coal mining costs compensation, but the onus should be as this is not yet general practice in any placed on mines to meet the full costs. coal mining country. However, planning The effectiveness of compensation authorities in Australia are applying payment policies should be closely similar calculations when reviewing new monitored by government and measures mine proposals and the Government of taken to identify and resolve causes of China should monitor such deficiencies. developments. Reducing greenhouse gas emissions Mine planning to minimize impact from coal mining cost Low methane emission coal mining Coal mines should enhance involving a combination of CMM environmental impact planning at mines utilization where practicable, destruction and be required to prepare of surplus CMM by flaring and environmental sensitivity plans for each destruction of ventilation air methane proposed longwall panel, assess the (VAM) by oxidation is technically impact of coal extraction on land feasible. MOEP has issued a trial stability, land quality, water courses, standard on reducing coal mine aquifers, built development and emissions which focuses on CMM infrastructure and estimate the costs of utilization and prohibits venting of mitigation and reparation. drained methane where methane concentration is 30 percent or higher4. This provides an effective decision tool However, many mines are draining for senior mine management who must methane at low concentrations, within or choose whether working a particular close to the explosive limits, of which longwall panel is financially viable, while some is used in special engines but at the same time meeting environmental most is vented. MOEP should therefore standards. A suggested approach based liaise with SACMS to introduce a on a successful system used by the requirement for these mines to raise gas former British Coal is summarized in drainage standards to improve safety, Appendix 6. The onus is with the mining and also to increase the potential for company to remedy any unacceptable increasing capture, utilization and damage caused by mining and to plan destruction of CMM. the lowest cost strategy to the business. Self-regulation works satisfactorily when The MOEP emissions standard should failure to address any impact is be further revised to include VAM penalized. However, it is necessary that abatement. This is because more than penalties exceed the remedial costs. 70 percent of the methane released by Enforcement is through legal action mining is emitted in the ventilation air. taken by those affected or by a Such policies can be adopted without government environmental enforcement compromising the economics and agency. international competitiveness of China's coal industry because of Clean Full redress for mining induced Development Mechanism (CDM) damage financing. However, China's CDM Individuals and organizations whose approval procedures urgently need to be land, roads, property, livelihoods, water supply and any other activities or 4The current national regulation for the resources have been affected by coal minimum methane concentration that can be safely utilised at coal mines 102 Environmental impact streamlined to facilitate rapid and energy users in China could play a role significant reductions in emissions. by contributing funds and expertise to improvements in the sustainability of the Engendering corporate responsibility coal mining industry in China. Some The Government and responsible coal international companies are already and energy users should encourage assessing ways of achieving effective increased corporate responsibility for the participation to discharge their social environment among China's coal mining responsibility and successful enterprises. Conversely, international applications should be identified and companies that wish to demonstrate popularized. corporate responsibility as coal and Chapter 7 Real costs and stabilized prices China has relaxed price controls on coal do not have to recognize these as being and has, theoretically, fully liberalized costs. If the mines are forced to take the market. Allowing supply and demand these into account as costs, they will to freely interact is the best way forward have stronger incentives to reduce these for China's coal sector, but for the costs and accordingly environmental market to operate efficiently the and safety performance will improve. Government should ensure prices reflect The difficult part is determining the true the true costs of coal production. costs and then allocating these costs over the life of a mine. These costs will The State and private coal mines will differ from locality to locality and will under-spend on health, safety and change over time as incomes change environmental protection because they and relative social valuations change. 7.1 True cost of producing coal The costs of coal production borne by a Coal production costs are recorded in coal mining enterprise are far from the accounting systems of coal complete. Some costs are paid for by enterprises under the following central, provincial and local headings: governments through grants and subsidies. Of particular importance are 1. Materials environmental and safety costs that are 2. Salary and employment costs not fully met by mining enterprises. 3. Electricity These costs need to borne by coal 4. Depreciation mining enterprises if the industry is to be 5. Shaft and roadway development sustainable. 6. Maintenance 7. Repair Coal mining costs are determined from 8. Subsidence compensation entries into a specific account template 9. Others which all enterprises are required to use. The standard cost categories do not A safety fee is also used to account for allow the full true costs of coal mining to safety-related spending and compliance be accommodated. Unaccounted for with safety regulations. However, this is costs are either absorbed through largely an accounting split, difficult to internal enterprise accounting, various equate with true safety initiatives and central and local government subsidies does not generally correlate with the or are not met. Operating costs are safety performance. notoriously difficult to decipher. The above categories do not allow easy comparison of all the costs now borne 103 Real costs and stabilized prices by coal mines, many of which are supervision of government. This is a attributed to "Other" which can account major reform. A previous fee, the now for as much as 38 percent of the abolished "energy construction fund," operating cost. was levied by the local Shanxi Provincial Coal Transportation and Sales The Shanxi Government has been Corporation, a large SOE, rather than progressive in assigning true production directly by the Government. costs for coal and has trialed measures prior to wider introduction in China. The problem with fixed unit charges is Recently introduced charges are: that there is no incentive to improve performance to reduce them. If costs · A sustainable coal development fund incurred, for example environmental implemented in March 2007. Under costs, are directly related to the impact this fund, companies are required to of mining then coal companies will have pay 14 yuan (US$1.80), 18 yuan stronger incentives to reduce them and (US$2.43) and 20 yuan (US$2.70) environmental performance will improve. respectively for each tonne of steam coal, anthracite coal and coking coal Mining cost factors not directly they produce. This fund will be used accounted for at coal mines for environmental and social projects. During the planned economy period, the · An environmental restoration fund Government undertook all of the geological surveys and there were no payable by local coal companies at charges for the exploration or 10 yuan/t (US$1.35) of coal exploitation of coal resources. Systems produced. This fund is for are now being developed which are environmental measures around coal intended to pass all these costs to coal mines aimed at protecting water mining enterprises, including sources, preventing silt and mudflows administration charges. Various and controlling pollution that would government imposed fees have been have been caused by mining introduced in the past. A water resource activities. The fund will also be used fee imposed in a 1982 regulation to restore previously damaged areas. required enterprises that constructed their own water supply to pay 0.12 · A social fund to which Shanxi coal yuan/m3, for industrial use, to the water companies contribute 5 yuan/t resources department. From 1993 to (US$0.68) of coal produced to 1996, various regulations introduced a compensate the laid-off employees of coal resource tax, a sales based mineral bankrupted local coal companies, in resources compensation fee, exploration addition to various other training and and mining rights fees, a land social security expenses. rehabilitation fee and a soil erosion prevention fee. Local coal mines in The latter two fees will be levied from Shanxi were also required to pay 20-30 the beginning of next year onwards, as yuan/t into an energy fund which was some coal companies have told the used mainly by local government for Government that they are under already infrastructure developments. This has under too much financial pressure this now been replaced by a sustainable year and could not meet the fees. The development fund charge which applies commercial viability of some mines will to all mines. Coal mines in Shanxi have be drawn into question as soon as they historically faced a plethora of charges, are required to absorb the true cost of many of them with no legal basis which mining. increase enterprise costs. As many of these were not true external costs they Funds raised by the two new fees will be were economically damaging to the kept in separate accounts, and will be mining enterprises. The Shanxi used as specified under the direct provincial price bureau has cancelled 104 Real costs and stabilized prices some 16 charge categories placed on reasonable and not unusual course of coal mines and in 2005 the State action by governments wishing to Council decreed that non legal fees address national, social issues. should be banned. There is no place for these in a market system. The fact that massive expenditure on mine safety improvements has yielded a While principal external cost items have sufficient reduction in accidents in been identified, fees are often KSOCM to meet government targets insufficient to meet the costs. For would indicate that any recent under example, surface subsidence damage spending is not significant and can be costs on average in Shanxi are some ignored. So while theoretical under nine times higher than the fees charged. spends of 5-10 yuan/t have been This problem arises because fees are identified, there is no basis at present for calculated by a standardized formula including these as unaccounted for rather than based on site specific costs. In a market system, mines incur situations. all the safety costs involved in meeting the legal safety standards. The cumulative social impact of Occupational health costs are relocating villages in mining areas to substantial, although now that all mines reduce the amounts of coal sterilized in are required to operate social insurance pillars of support is not fully appreciated schemes these costs should be largely and compensation payments seem to internalized. However, it will be some involve significant input from time before private and LSOCM are able government. These would also normally to offset these costs by insurance due to be included in the category of lack of knowledge of dust control subsidence costs. measures and high risk of disease occurrences. There is incomplete provision for the engineering, environmental and social The remaining costs not fully accounted costs of closing a coal mine and also for for by mining enterprises, and which dealing with post closure environmental should be included in a future liabilities. Coal mining enterprises do not sustainable mining business, are have funds for addressing these matters environmental. The major environmental and must resort to the Government for costs of mining activities for mineral assistance. resources in mining areas relate to pollution and damage to the land, water, The Government often publishes atmosphere and vegetation. The shortfalls in mine safety expenditure, but estimated shortfall paid by coal mining it is unclear whether these represent real enterprises in Shanxi is US$5.3, avoided costs. The Government and its although there are indications that this coal industry management departments estimate may be too high (see Chapter specify safety projects and equipment 6). There is no unified China standard upgrades that coal mines are required to for accounting for environmental cost implement. The Government determines items. the expected costs and any under spending is interpreted as a failure to Social cost of methane released by invest adequately in safety mining improvements. If, in fact, the investment is necessary to enable a mine to attain Greenhouse gas emissions have long- the required standard of safety, then the term climate change implications from under spent amount can be regarded as which a social cost can be deduced. a cost that the mine should have While these costs are not yet included in incurred. Some of the safety conventional coal mining operating cost improvements involve one-off capital analyses, they are relevant from a long- outlays subsidized by the State, a tem economic viewpoint to China. 105 Real costs and stabilized prices Coal mining releases methane, which future mining activity to the social impact together with all the other anthropogenic of greenhouse gas emissions. greenhouse gas emissions is "almost certainly" (IPCC 2007) contributing to The analysis presented in Table 7.1 global warming. Only the methane uses the estimated average methane released by mining is considered in this emitted per tonne of coal mined in analysis because the CO2 produced by China. This average was determined combustion is an end-use cost. from a model developed in a World Bank CBM/CMM study in which small coal According to Stern (2006), the mine capacity is progressively replaced generalized social cost of emissions by longwall coal mines with higher under a business as usual scenario is relative emissions due to the larger US$85/t CO2 equivalent emitted, and if volumes of strata disturbed per unit efforts are made to stabilize CO2 (other output (World Bank, Beijing 2006). gases are not considered in the analysis) in the atmosphere at 450-550 The costs derived in Table 7.1 are very ppm then the social cost of carbon will tentative. The BAU case is probably not be reduced to US$25-US$30/t CO2 too far from the levelized cost of equivalent. The predictions, although mitigating methane emissions from coal dependent on some very broad mines, although the cost element for the assumptions, do provide some basis for removal of methane from ventilation air estimating the potential contribution of is uncertain at present. Table 7.1 Estimated social cost of carbon attributable to coal mining based on Stern (2006) Year Relative Emission factor Cost/t coal at Cost/t for stabilized emission tCO2e per tonne of BAU of US$85/t situation at US$30/t m3/t coal mined CO2e CO2e 2007 9.3 0.1401 11.9 4.2 2010 9.5 0.1431 12.2 4.3 2020 10.0 0.1506 12.8 4.5 An indication of a possible future trend in post-Kyoto world, is illustrated in Box developed countries which eventually 7.1. will probably also apply to China in the Box 7.1 13 Feb. 2007 (Bloomberg) -- Centennial Coal Ltd.'s proposed A$9 billion ($6.9 billion) Anvil Hill coal mine project is at risk because a state government is forcing the company to factor in a cost of A$109 ($85) for each metric ton of carbon dioxide created when the coal is burned, the Australian Financial Review said. The added cost would be A$1.4 billion a year if calculated at $85 a ton, the rate proposed in an Oct. 30 report from U.K. Treasury economist Nicholas Stern, which the New South Wales Department of Planning has requested be applied, the Review said, citing the company. The department is assessing the mine for development approval. Centennial has rejected the carbon price, saying it was impossible to accurately measure the costs of burning the coal after it was sold overseas. Production cost trends during coal transfer of social liabilities to local sector modernization government, the shedding of some From 1997 to 2003 average production surplus manpower and the closure of costs in KSOCM fell from 151 yuan/t to some old, high cost, exhausted mines. 116 yuan/t. This mainly reflects the In contrast, the last few years have seen large increases in production cost for 106 Real costs and stabilized prices various reasons, including increased increasingly sophisticated mechanized expenditure on safety, increases in mining equipment and technologies is salary and increasing material costs. being hampered as the skilled labor From 2002 to 2005 average monthly required to operate the equipment is in salaries have increased by 67 percent. short supply. Salary and employment costs will Emphasis on resource protection in the continue to rise over the next decade 11th Five Year Plan will further drive and bring pay more into line with other small mine closure, requiring large industrial sectors because mines are mines to achieve high resource recovery competing for labor with other sectors of thus constraining the scope for the economy. The commercial response productivity improvements, keeping will be to shed manpower and increase production costs relatively high and efficiency, but the use of more and squeezing profit margins. 7.2 Coal price Market pressures, coal quality and but insufficient exposure of the electricity price supply business to market forces. Unlike Increasing demand for coal, removal of coal prices, power prices are still artificial pricing, internalizing of external strongly controlled by government. While mining costs and reduction of coal some latitude in power price linked to supplies from unsustainable low cost coal price increases is allowed, mines, have resulted in rising coal electricity prices are not allowed to prices. Prices are set to remain high as adjust to the freer market conditions in demand is projected to continue rising to which the coal mining industry operates. fuel increasing numbers of power plants There is no incentive for power plants to with the coal supply chain constrained stock or source additional coal to meet by transport capacity limitations. unusually high demand as they receive no commercial benefit. The limitations In the first eight months of 2006, the of the coal supply chain to thermal average commercial gate price from power plants will not be wholly resolved KSOCM was 300 yuan/t (US$38/t). until power prices are determined by a Thermal coal price increases ranged market system. from 3-20 yuan/t in September 2006 across many provinces due to rising Coal prices in China are determined by demand with the approach of the supply and demand with regulatory heating season. forces applied on the consumption side to encourage use of clean coal Late stocking by power plants and other technologies and emissions control. consumers delaying expenditure put Large power producers are contracting upward pressure on supply. This shows for supply of premium grade coals, that the coal market is working. whereas household and small business users buy cheaper, lower quality coals. In the winter of 2008, China suffered its The converse is preferable, as large worst ever power shortages, power plants can utilize proven approaching 70 GW, as around 10 technologies to control sulfur, NOx and percent of generating capacity was dust emissions whereas small volume closed due to lack of coal supplies coal users tend to use simple stoves (Reuters UK, 23 January 2008). Rising creating low level pollution which is coal prices, small mine closures, limited problematic to mitigate. Supply side transportation capacity and adverse regulation is being used, but is difficult to weather were blamed. However, the enforce. Regulations limiting permitted underlying cause is not a high coal price sulfur and ash contents of urban coal supplies have been introduced in many 107 Real costs and stabilized prices of China's cities. While this is an Washed steam coal output was 84 admirable policy, which signals to percent of the feed and 61 percent for suppliers the need for good quality coal coking coal. for it to be effective, there must be a premium to the supplier and penalties The only viable mechanism available for for suppliers and users of non-compliant driving users to purchase cleaner coal is coal. through emissions penalties, but it is only practicable to enforce such Coal washing can improve quality and measures at major commercial and reduce pollution when coal is burned, industrial sites. There are also but the added cost of processing makes restrictions on the quality of coal mined, for an unattractive price for consumers, to try and keep high sulfur coal off the especially cash-strapped enterprises market, but where local supply is tight, and poorer members of the community ­ these coals are still being mined. those most affected by pollution. Awareness and social responsibility needs to be raised among the public to The Government has been promoting change their coal buying habits. While coal washing, but the quantity of coal this may be effective for the emerging subjected to coal washing depends on middle classes, it is likely to have little the market demand. There are still not impact on lower income groups. For the adequate incentives for the power latter, the most effective response is the companies and industrial end users to provision of alternative, cleaner fuels use clean, but higher price washed coal. competitively priced against coal. According to data from the Statistics Bureau, the proportion of coal from Coal prices vary from region to region as KSOCM that was washed was about 26 shown in Table 7.2. This is due to percent in 2005. The total quantity of differences in road tolls, railway washed coal products in 2004 amounted transportation costs, resource use tax, to 193 Mt of coking coal and 341 Mt of safety expenses and resource use steam coal. Coal preparation plants at charges. The dominant cost factor, KSOCM washed 446.5 Mt of raw coal of however, is rail transport. which 53 percent was for energy and the remainder for metallurgical purposes. Table 7.2 Average sales price of commercial coal from KSOCM (Jan-April 2006) Regions 2006 (4 months) Difference from Difference from yuan/t 2005 (4months) 2005 (4months) yuan/t % North China 291.92 18.57 6.79 Northeast 268.96 -13.40 -4.75 East China 356.09 -35.01 -8.95 Central-south 317.46 13.63 4.49 Southwest 335.97 6.22 1.89 Northwest 208.31 13.47 6.91 Source: Study Team According to government analyses, and demand distribution. While on during the 10th Five Year Plan, coal average a balance was achieved, there supply and demand in China was largely were large price fluctuations which balanced. Taking surface stocks into caused disquiet to the Government. account with coal transport capacity was the critical factor in matching the supply Coal price controls 108 Real costs and stabilized prices In 2002, coal prices were freed from electricity prices accordingly within government price controls with the defined limits. exception of contracted power station coal for which the Central Government In 2006 the Government relaxed price set a reference price for coal supply controls further on coal and all but contracts between coal suppliers and abolished price fixing, the caveat being power generators. However, this that the Government would exercise process led to increasing differentials oversight over contract prices negotiated between contracted power coal prices between buyers and sellers. and spot market prices. The power companies benefited from the subsidy The ROM coal production costs and coal and the large mining enterprises prices at KSOCM during the planned suffered from low margins on coal sales economy and transition to a market to power producers, and even made system are shown in Table 7.3. losses, as costs increased. Comparing the last two columns shows that since 1997 a steady margin Stalemate approached as coal between price and production cost has producers became increasingly reluctant been established of 40-60Y/t (5.2- to enter into contracts and power 7.8US$/t). producers were reluctant to pay the market price. At the end of 2004 the Prior to that time, under strict Government saw the need for action and government price controls, differences introduced a mechanism linking coal and between average price and costs ranged electricity prices. The aim was to allow wildly from -15Y/t to +16Y/t. Businesses coal prices to follow market fluctuations, cannot operate with economic efficiency but still at a lower level, and adjust under such conditions. Table 7.3 ROM coal production costs and coal prices at KSOCM Average Average unit Average price Price regime Year production Sales Price minus cost (yuan/t) production (yuan/t) cost (yuan/t) Central Government Single 1953 9.72 11.00 1.28 set coal price planned 1960 9.26 price system 1965 15.78 17.68 1.90 1970 13.49 1975 15.86 16.48 0.62 1980 20.05 21.33 1.28 De-regulation Double- 1985 29.33 26.05 -3.28 commences track price 1990 58.60 43.85 -14.75 system (1) 1991 64.87 58.45 (2) -6.42 1992 74.70 90.67 (2) 15.97 The Government is 1993 95.50 105.42 (2) 9.92 increasingly relaxing 1994 101.35 108.94 (2) 7.59 coal price controls 1995 107.03 115.00 (2) 7.97 1996 112.31 125.00 (2) 12.69 1997 108.57 166.60 58.03 1998 110.82 160.20 49.38 1999 103.80 143.98 40.18 2000 101.54 140.19 38.65 2001 110.71 150.99 40.28 109 Real costs and stabilized prices Coal price controls 2002 121.37 167.81 46.44 largely abolished 2003 123.87 173.81 49.94 2004 169.0 206.43 37.43 2005(3) 208.0 270.20 62.20 (1) Government managed power coal contract price and market price; (2) Estimated (3) Average sales price from KSOCM of which the power coal price component was 212.75 yuan/t. Source: The Operation of 2005 Coal Economy, China National Coal Association; "China Electricity and Coal Industry", China Coal Industry Publishing House, 2004. China Coal, March 2006. While the coal market has been freed, prices for power coal rose by 10 percent the electricity market has not. Power in 2007 (Reuters, UK 17 Feb 2008). generators cannot pass on the true costs of coal to consumers, thus reducing the economic efficiency of the Coal pricing policy and regulation energy market. In 2005 the State Market thinking is taking time to Council approved the implementation of displace an ingrained command a pricing mechanism to link electricity economy approach. and the government charges to coal costs. An increase in the continues to view coal price as important coal price is passed on to electricity to inflation control and macro economic consumers when the average price of stability, thus should be subjected to coal changes by more than 5 per cent oversight, and control if necessary by over a six month period. If the change in government. Strict market economic the average coal price is less than 5 per theories cannot be realistically applied in cent in a six month period, the China and must be tempered in the light percentage price rise is carried over to of China's unique circumstances and the next six month period. Electricity practices. generators can pass on 70 percent of the increase in coal prices to end users, The Price Law of the People's Republic but are obliged to absorb 30 percent of China, which took effect on 1 May through productivity gains (Melanie and 1998, still provides the powers for the Austin 2006). NDRC to intervene in pricing. Despite coal price control relaxation, adjustment The NDRC released a notice (Wang T, mechanisms still remain in the form of Interfax-China 26 November 2007) coal price adjustment fees. For example, offering guidelines for the signing of on 1 August 2004, Guizhou Province annual key coal contracts for 2008. The started to raise coal price adjustment NDRC anticipated that coal contracts fees at the point of sale for raw coal involving 785 Mt of coal for the railway (including washed and mixed coal) at 30 industry would be signed but stated that yuan/t and washed coal (including rail transport plans cannot be made anthracitic lump coal) at 50 yuan/t. before the contracts are signed. In Shanxi Province also adjusts coal price contrast to previous years no mention according to resource recovery as was made of linking electricity prices shown in Table 7.4 as an incentive to with coal prices. By end of January maximize resource recovery. 2008, power prices had still not been raised since June 2006, whereas coal Table 7.4 Shanxi province coal price regulation Resource recovery (%) Price adjustment (yuan/t) >65 0 110 Real costs and stabilized prices 60-65 1-10 40-60 10-20 20-40 20-30 The NDRC and the General at coal mines. Secondly, is the issue of Administration of Quality Supervision, cost and profit. Cost and price jointly Inspection and Quarantine issued a determine the ROA (return on assets) notice in 2007 on further strengthening and a healthy ROA releases economic coal quality management. The notice resources (capital, loan, talents and new emphasizes that coal prices should be technologies) and will support related to coal quality. The issue seems investment in new capacity. Conversely, to be that high quality coals are being poor returns signal a drain on the squandered through failure to reflect the economy and stimulate government into quality in the marketplace. In some parts adjusting policy. In the past, government of China suppliers are not providing coal response was invariably to adjust prices to the standards specified by users, yet but it has progressively relaxed its grip pricing them as if it was. on coal price controls and is allowing market forces to act. The third influence The pricing system is distorted where is the price relationship between production from illegal mines is being domestic coal, international coal markets traded. Discounting to place illegally and alternative energy sources. These mined coal and limited access to the relationships are complex and market means that quality is not government attempts to control the necessarily reflected in the price. The balance are almost certainly going to NDRC notice requires that coal fail. transportation companies refuse transportation services to coal mines Coal prices are jointly determined by the without coal production licenses and to interaction of supply and demand. The illegal coal trading companies without demand for coal depends on the price of coal business licenses. coal relative to other energy sources. Coal prices will only accurately respond The supply of coal depends on a to supply and demand in a reputable comparison between coal prices, trading environment and the quality production and delivery costs. High control systems in China need rates of return will provide an incentive overhauling if effective pricing is to be to invest in the industry in new achieved. In a free market, prices would production capacity. Low rates of return automatically relate to coal quality. will undermine incentives to invest in this industry. The average domestic price of Chinese raw coal was 508.17 yuan/t (US$68.86) The coal price is stable when supply and in October 2007, over 12 percent higher demand are closely matched, and fair than in the previous year (Ministry of competition prevails. The progressive Commerce, 22 November 2007). reduction of supply from small coal Continued growth of energy intensive mines that do not carry the full costs of industries and rising crude oil prices has safety, social and environmental increased demand for coal and prices protection is creating conditions that are have risen. increasingly becoming equal in China. During the transition to a freer coal Influences on coal price and its market, market corrections have been stability inhibited by governmental actions In China's coal market system, three causing imbalances with cyclic major factors influence coal price. regularity. Firstly, the relationship between coal supply and demand, which takes into Coal pricing does not strictly reflect account coal in storage and production market conditions as government co- 111 Real costs and stabilized prices ordinates production, transportation, centre. Whether foreigners will be able sales and demand through its policy to participate is uncertain. guidance and supervision mechanism, as well as determining rail transport Stabilizing price through futures pricing. The NDRC raised the national trading unified railway goods tariffs from 8.61 fen/t.km to 9.05 fen/t.km in April 2006 Developed countries, in which coal which directly affected price to the futures are traded, arguably achieve customer. In a competitive transport more stable pricing than China. The system blanket increases would not be futures markets with uniform commodity made. pricing, grading and delivery enable buyers to protect themselves from price The annual Coal Order-Placing fluctuations by locking in a specific price Meetings, an aftermath of the planned for a commodity over a future period of economy, until recently weakened the time. effectiveness of the market function for efficient resource allocation. However, Futures markets allow both buyers and this is no longer a factor. sellers to reduce their exposure to risk by hedging against price changes. China Internationally, network transaction and has implemented a futures trading trading centers ensure coal markets platform under the auspices of the China function effectively and China is set to Securities Regulatory Commission establish a national trading centre in (CSRC), an institution of the State Taiyuan, Shanxi Province at a cost of Council of the People's Republic of one billion yuan, including an exhibition China (PRC) with functions similar to those of the US Securities and Exchange Commission. 7.3 Reform needs The true cost of coal is currently when supply shortages arise. obscured by government subsidies, Government price controls at any part of inadequate environmental and social the chain hinder market participants protection and insufficient attention to from pursuing the most efficient safe working practices. At the first pathway. quarter of 2007 these costs were in the range US$1.2/t ­ US$5.3/t (based on Greater exposure of China's coal mines studies in Shanxi), excluding the to competition than is currently the case, notional social cost of climate change in a market environment where the full attributable to coal mining activities in costs of actual impact is met, would lead China. Full production costs must be to a realistic pricing structure. Stability of borne by all coal mining enterprises. coal prices depend on coal supply and demand. A market system will provide In a balanced economic environment the balances through price variations coal price is determined by the marginal and these will be influenced by domestic cost of production, marginal investment and international factors. A coal futures cost of capacity increases, investment trading market would help buyers and costs for new capacity, transport costs, sellers reduce their exposure to price commissions by handling agents, profit fluctuations. and taxes. Competitive bidding by consumers, consequent inflationary Market thinking is taking time to displace pressures on essential mining materials the ingrained command economy and investment into expanding capacity approach. Government continues to first pushes up prices and then costs view coal price as important to inflation 112 Real costs and stabilized prices and macro economic stability, thus should be subjected to oversight, and Longer term contracts between coal control if necessary by government. producers and power generation Strict market economic theories cannot companies would lead to improved price be realistically applied in China and stability. There is evidence of a move by must be tempered accordingly. electricity companies towards Nevertheless, economic efficiency, negotiating longer term contracts outside which is a cornerstone of sustainable the annual government sanctioned coal development, will not be achieved conference. For example, in June 2005, without allowing market conditions to Huaneng Power International prevail. It is therefore recommended that Corporation signed an agreement with government reduce intervention in coal Pingdingshan Coal Group to supply 0.5 and supply chain pricing. Mt of coal in 2005 and 2 Mt for both 2006 and 2007 (Interfax 2005 from Between the mine and coal user, Melanie and Austin 2006). additional fees are sometimes incurred. Some of these have no legal basis or Coal washing can substantially reduce regulatory function. In accordance with the ash content of coal, leading to much the State Council's direction, such lower particulate and SOx emissions charges should be removed. The effect from the burning of coal and improved of these is to increase coal price for no efficiency, which in turn leads to lower added economic benefit and thereby CO2 emissions. However, coal washing reducing the competitiveness of the involves additional costs and customers coal. will only buy the coal if clean coal is a process requirement or if emission A coal futures trading market in China penalties exceed the difference between could reduce the exposure of mining the prices of washed and raw, screened enterprises and customers to price coal and there is a high chance of volatility. However, concerns about prosecution. An increase in saleable government intervention in mining proportion of raw coal output would be operations and rail transport allocation matched by reduced gas emissions and and consequent price risks that are not environmental damage caused by easily quantified might deter brokers. As mining in proportion to the additional a result more transparent coal supply coal recovered by washing. Clearly, market conditions need to be major environmental benefits would established. A free flow of statistical accrue from increasing the use and information would help to reduce efficiency of coal washing processes. uncertainty and assist supplies with forward planning. 7.4 Recommendations In a sustainable coal mining sector all same fees and requirements must be mines should meet the full costs of applied to all coal mines in a sustainable production and mitigation of any social industry. and environmental impact and these costs should be visible in accounting Climate change costs have not been statements. KSOCM already make factored into China's coal mining costs substantial contributions towards as this is not yet general practice in any mitigating their impact on health, safety, coal mining country. However, planning environment and the community through authorities in Australia are applying various mining fees, compensation similar calculations when reviewing new payments and social, health and mine proposals and the Government of accident insurance schemes. These 113 Real costs and stabilized prices China should monitor such Where there is a strong and natural developments. linkage between a coal mine and a power plant, good international practice Pricing of rail freight operations should is for long term (5-20 year) supply be more transparent and predictable and contracts to be signed between the mine should allow for the free negotiation of and the power plant. These contracts long-term transportation contracts with should fix annual volumes and set an suppliers. initial base year price that provides a reasonable return on capital to the mine Between the mine and coal user, and include provisions for annual price additional fees are sometimes incurred, adjustments based on cost-related some of which have no legal basis or inflation factors. As is common practice regulatory function. In accordance with worldwide, these contracts should also State Council's direction, such charges include incentives related to the should be removed. The effect of these customer's coal quality requirements is to increase coal price for no added and to coal quality testing procedures. economic benefit, thereby reducing the For this recommendation to be effective, competitiveness of the coal. power plants would need to be allowed to adjust power prices to reflect the initial Greater exposure of China's coal mines increase in coal prices that would result to competition, in a market where the full from such coal supply and pricing costs of mining are met, will lead to a contracts. Raising power prices would realistic pricing structure. Stability of coal not only adequately reward the coal prices depends on coal supply and suppliers and encourage more coal demand. A market system will provide investment, but it would also encourage the balances through price variations consumers to use energy more and these will be influenced by domestic efficiently. This would help reduce the and international factors. Any rapid growth of energy demand in the government attempts at stabilizing coal future which in turn would help reduce price will lead to a supply-demand the likelihood of future coal shortages. imbalance. Government should Coal mines and users should therefore therefore resist all temptations to be encouraged to enter into long-term intervene in coal pricing. contracts and a freer pricing policy established for the power sector. A coal futures trading market should be established in China to allow coal Coal mines produce coal of a quality to producers and buyers reduce their satisfy the requirements of users. The exposure to price volatility. air quality benefits of using clean, washed coal over dry-screened run-of- The Government should publish reliable mine are well recognized but users will monthly statistics on energy supply and only buy more expensive coal if made to demand, including coal. This should be comply with strictly enforced published in an international format environmental emission regulations and which will signal current trends. This will controls. Supply side coal quality assist mining companies, both in China policies have been attempted. However and overseas, to develop long-term these are largely unsuccessful, difficult business strategies, invest in new to enforce and should be abandoned mining capacity and mobilize coal and replaced by demand side controls. supplies and shipping capacity which will Coal quality for industrial and prevent sudden price surges on the commercial utilization should be international coal market and ensure controlled indirectly through more stable coal supplies to China's environmental legislation by imposing industrial consumers. and enforcing stricter environmental emission penalties. Environmental protection agencies will need to be 114 Real costs and stabilized prices strengthened to achieve this. coal users are paying sufficiently high Consumers can avoid emission emissions charges, they will pay a penalties either by end-of-pipe solutions premium for clean coal and this will or by purchasing higher quality coal. If encourage increased washing of coal. 115 Institutional and legal framework and policy Chapter 8 Institutional and legal framework and policy 8.1 Current status The institutional structure of China's coal petroleum, natural gas and nuclear mining sector has been undergoing energy. reform for a number of years to reduce the overlap between regulations and The current status of China coal department functions as well as remove industry legal framework inefficiencies. However, problems still remain. The State Council has There are many instruments by which transferred some regulatory powers for the coal industry is regulated such as safety management from NDRC to laws (legislation), policies, technical SAWS and SACMS, but NDRC still standards and rules, disciplines and considers itself as a source of safety criteria. Fundamental, is the Law of the initiative. While this is well intended it is People's Republic of China on the Coal largely ineffective. SACMS established Industry, formulated by the former two new departments in 2007, a science Ministry of Coal Industry and passed at and technology equipment department the 21st Session of the Eighth National with responsibility for coal mining People's Congress on August 29 1996. equipment and technical safety The legal framework encompasses laws, standards, and a department providing regulations, rules and other legal guidance on fundamental industry safety instruments to regulate coal exploration management and training. development and utilization, resource protection, production and operations, Increasing transparency and environmental protection and accountability to the Central supervision, health and safety, and Government has been achieved through administration of coal mining activities. SASAC (the State-owned Assets Supervision and Administrative Centrally formulated legislation includes Commission) which acts on behalf of the laws, administrative laws, and rules of State Council by supervising the use of departments while local legislation state owned assets and protecting the includes local decrees and rules of local interest of the owners. Other than governments. Some local governments representing the interests of the owner, establish additional regulating SASAC is not supposed to interfere with documents which are outside the scope the business activities of the state of the legislation, but usually enterprises. SASAC sends supervisory enforceable. There are many technical panels to inspect the business activities and economic regulations comprising of state enterprises which are obliged to administrative regulations (promulgated co-operate fully. by the State Council) and rules (promulgated by the Departments and A State Energy Administration has been Committees and Bureaus directly under established to supervise, among other the State Council) which are also duties, the implementation of the enforceable. The Central Government forthcoming Energy Law.. The aim of has promulgated over one hundred this new law is to provide an overarching laws, regulations, rules and other framework for energy policy, and it is regulating documents related to the coal being drafted in parallel with industry. amendments to existing energy-related laws on coal, electricity, energy The principle laws are summarized in conservation and renewable energy. Table 8.1 and these, together with There are no laws as yet governing associated regulations and rules, comprise the current legal structure of 116 Institutional and legal framework and policy China's coal industry which has evolved planned system towards a market during the institutional and economic economy. transition of China from a centrally Table 8.1 Broad scope of China's coal-related laws Laws · Energy (pending) · Coal Industry · Mineral Resources · Mine Safety · Production Safety · Prevention and Treatment of Occupational Diseases · Environmental Protection · Prevention and Control of Environmental Pollution by Solid Waste · Labor The coal industry administrative laws formulating and promulgating new and rules of departments can be divided regulations and rules to regulate the coal into six categories: coal resource industry, removing apparent problems administration, administration of coal as they arise. production and exploitation, administration of coal business and the Generally, local coal legislation is based market, coal safety administration and on the stipulations and requirements of supervision, coal mine employee rights Central Government legislation. The protection and environmental protection People's Congress of provinces, of coal mining areas. autonomous regions and municipalities (directly under the Central Government) Shortcomings and gaps in the legal formulate local decrees and local framework are currently being government rules. The municipal addressed and the Mineral Resources government, with the approval of the Law, Law of the Coal Industry and the State Council also can formulate Law on Safety in Mines are being corresponding rules. Local decrees and amended. The State Council through the local rules should not violate the central NDRC (the national administrative and upper legislation and the local department of the coal industry), SAWS, decrees and rules only take legal effect MOLAR and MOEP are steadily within their own administrative regions. 8.2 Reform needs China has enacted a series of laws, Shortcomings of China's coal regulations (ordinances) and rules to industry legal framework regulate the coal industry. However, until the coal mining industry becomes more China's legal framework which responsive to adhering to law and underpins the coal industry is incomplete regulations, especially safety and and contains serious structural defects. environmental regulations, eliminating Many laws, regulations and rules have deficiencies in the legal framework will not been enacted and in particular many have no impact on actual performance. are neither monitored nor enforced. Due Nevertheless, the legal basis should be to the frequent legislative changes, reviewed and revised to ensure it is amendments and abolishment, the consistent with, and supportive of, composition of the framework is sustainable coal mining activities. constantly changing. The overall legal authority of the legislation is relatively 117 Institutional and legal framework and policy low, exacerbated by the large number of area that should be covered by rules emanating at local level. Many legislation. rules are provisional and consist of emergency measures introduced for Domestic experts have identified crisis management, rather than long missing legal details and lack of explicit term or being logically derived. regulations on coal exploration, transfer Consequently, the relationships between of mining rights, mining methods and the components of the legal framework resource protection to match currently are not orderly, systematic or sufficiently applied policy criteria. Such regulations well coordinated. Overlap and gaps exist are unnecessary in a market system and in the legislation, while some have not further legal definition would be been enacted and other legislation is unhelpful. In a market system there is no impractical or outdated. need for a phalanx of prescriptive policy standards and regulations. According to domestic legal experts, specific problems exist within the legal The stipulations on coal mine safety, framework due to the pace of coal sector mining area protection, and development which has outstripped the environmental protection issues during legislation. However, most, if not all the the exploitation and utilization of coal are deficiencies advocated as requiring legal incomplete. Coal mine accidents in stipulations relate to prescriptive China occur too frequently. While the regulations, for example on resource causes are many and various, there is a recovery, which would not be needed in perceived connection with the a more developed market system. A incomplete stipulation of coal laws, such complete legal system is desirable to as Law on Coal Industry and The Mine ensure that responsibilities and liabilities Safety Law. The main problems of coal mining enterprises and regarding the stipulations on mining area government are unambiguously defined. protection cited by domestic experts are However, during a period of rapid reform that they are not detailed enough, and economic transition, there is a largely impractical and incomplete in danger of introducing barriers to change defining legal responsibilities. by trying to underpin dynamic change with rigid rules. Detailed stipulations regarding the conditions and procedures for mine The requirements for establishing coal closure and abandonment are absent mines and permitting coal production from the current Law on Coal Industry. under the existing "Law on Coal Some state-owned large and medium- Industry" are insufficiently onerous, scale coal mines have exploited this allowing access too easily to the coal loophole and taken advantage of mining business. Coal management insolvency proceedings to strip off bad departments and other relevant assets even from coal mines that were departments have too much power not actually exhausted. Moreover, some through approval and permitting mines, which should not have been procedures which allows some closed or abandoned were sold or individuals and units with insufficient transferred at a low price to individuals funds, backward technology, poor safety causing huge losses of state-owned production conditions and a weak assets. This poor governance means environmental protection capacity to that management can pursue private enter the coal mining sector. rather than corporate interests. The principle of royalty payment for Coal sector administration exploitation of coal resources is not prescribed in the Law on Coal Industry. Coal sector management by the various However, due to its importance this is an relevant government ministries and departments is not sufficiently effective. Vast tracts of agricultural land have 118 Institutional and legal framework and policy already been lost due to mining in decouple local government from China, aquifers disrupted, water courses lucrative associations with small coal polluted and millions of miners exposed mining activities, and to deter provincial to unacceptable health and safety governments from intervening in the conditions. Reforms are urgently operational strategy of large mining needed which ensure that mines meet enterprises which come under their the full social, safety and environmental jurisdiction, have had limited success. cost of their activities to ensure Provincial governments have a right to sustainability of the mining sector. While regulate the activities of mining the Central Government has introduced companies to ensure that the progressive policies to address some of environment, workers and communities the issues, these are not being are adequately protected from the implemented uniformly at local level due adverse effects of coal mining, but not to to conflicting interests and corruption. intervene in commercial activities. Continuing reforms demonstrate the The management system of the coal Government's commitment to industry is weak and poorly organized. modernizing the industry and its Governmental administration of coal determination to improve the safety and mine enterprises is effected mainly environmental record, but the "top down" through licensing and certification management approach remains documents which are issued and ineffective and regulations are ignored at inspected by a multiplicity of different local level where the imperative is authorized government departments financial gain at any cost. Attempts to (Table 8.2). Table 8.2 Government administration of coal mining enterprises Licenses and certificates Departments involved in issuing and inspection (1) Mining License (1) National land and resources (2) Coal Production License administration departments (3) Safe Production License (2) Work safety supervision and coal mine (4) Safety Qualification Certificate of safety supervision administration Director of Coal Enterprise departments (5) Safety Qualification Certificate of (3) Business administration departments Deputy Director of Coal Enterprise (4) Coal industry administration (6) Safety Qualification Certificate of safe departments at all levels and the coal production managers of coal enterprises industry administration departments at (7) Qualification Certificate of Director of provincial and municipal level Coal Enterprise (5) SASAC departments (8) Professional Qualification certificate for (6) Administrative departments of coal mine special working positions environmental protection. (9) License of Coal Business and (10) Business License. Departments of finance, labor and social security are also involved in the process. There is little interdepartmental co- departments are meant to be servicing. ordination and each department tends to For example, the coal business license follow its own aims. The management issued by administrative departments of responsibilities and rights of different the coal industry at a local level specifies department are not clearly or legally safety requirements, but according to defined and there are many overlaps the stipulation of the legislation, the safe and gaps. Interdepartmental disputes production supervision and over inconsequential matters and power administration department must issue struggles are common place to the the safe production license again. Thus, detriment of the sector which the administrative resource is wasted and 119 Institutional and legal framework and policy the administrative burden to coal mining At the end of 2006, five coal mining enterprises increased. sector management functions were Administrative complexity, overlap and transferred from the NDRC to SACMS: inefficiency are exemplified by the 1. Framing of orders and standards situation in Shanxi Province (Appendix in coal industry 7), which is gradually being resolved. 2. Certification of coal mine There is a clear need for restructuring of leaders the coal sector administration to improve 3. Approving the construction efficiency and functionality by defining projects of coal mines planned the roles and responsibilities of by NDRC departments and removing overlaps, 4. Verifying technical safety particularly at the provincial and lower renovation and methane levels. Provincial departments are management projects at accountable to the Central Government KSOCM and should be the highest level of 5. Instructing the provincial operational involvement, with the central management of the coal industry administrative role being largely and the basic safety strategic review and development of management of coal mine regulatory mechanisms and subsequent enterprises monitoring of their implementation and Overlapping functions and excessive effectiveness. The provincial bureaucracy means that most coal departments should be responsible for departments after rationalization should enforcement of the regulations. have adequate staff resources. In March 2003, the SETC was abolished However, central and provincial safety at the central level, but the provincial departments under SACMS are likely to and lower level departments still remain. need more senior and specialist mines They continue to undertake functions inspectors to strengthen coal mine that overlap with coal administration inspection and enforcement. departments further decreasing administrative efficiency and imposing In March 2008 the Government additional burdens on coal enterprise announced a "major" restructuring of its administration staff. At local level the administration that involved forming five ETC had a leading role but with the new "super ministries" (Xinhua, 11 demise of SETC that position became March 2008). irrelevant. Amongst other changes SEPA gained ministerial status to become MOEP. To SAWS and SACMS are located in the strengthen the government management building of the former Ministry of Coal of the energy sector, a high-level inter- Industry, which was abolished in 1998, ministerial coordinator, the National inheriting many of its staff and still Energy Commission, is to be established, undertakes coal enterprise production with a State Adminstration of Energy as and performance monitoring that lies its executive arm under the NDRC. The outside its main function of safety new Administration will integrate the administration, regulation and NDRC's functions relating to energy enforcement. At the same time the management and the functions of the NDRC is leading safety initiatives with National Energy Leading Group and the SAWS and other government Commission of Science, Technology and departments as subordinates for which Industry for National Defense on nuclear SAWS should take responsibility. The power management. strength and role of the NDRC is in strategic planning and broad goal setting While promising a reduction in to implement government policy. bureaucracy, there otherwise seems to be little overall change. After re- Recent institutional reforms organization, the State Council will have 120 Institutional and legal framework and policy 27 ministries and commissions apart powers the environment ministry will from the General Office after the re- have to raise its effectiveness are organization, compared with the present unclear. The re-organization has not 28. seemingly contributed to improving coal industry management co-ordination at Energy strategy development, sector the Central Government level. However, planning and management will be the a body has been identified whose responsibility of the new State Energy responsibilities should include strategic administration. What, if any, extra coal sector planning. Table 8.3 Clarification and reform of roles of the main Government departments with coal industry responsibilities NDRC and MOLAR and SACMS and MOEP and provincial coal provincial land and provincial safety provincial departments resources bureau environmental departments protection bureau STRATEGIC LAND USE AND HEALTH AND ENVIRONMENTAL PLANNING RESOURCE SAFETY IMPACT RIGHTS ALLOCATION Provide strategic Establish a Independent of Raise standard of oversight and department with other government EIAs monitoring at sole responsibility departments national for coal within Assess mine project government level MOLAR Relinquish coal compliance with sector performance environmental Consolidate coal Management of land monitoring to a regulations mining industry use and property central coal management department at Strengthen EPBs to duties in a single Administration and national level inspect mine sites, cohesive issue of exploration encourage department at and mining rights Strengthen the implementation of national level through bidding and powers of inspectors EMPs and enforce valuation methods but centrally led. environmental At provincial level Shift accident regulations transfer ETC Holding and response from mining functions to managing post reactive to risk Provide guidance coal industry closure restoration based prevention and training to coal bureau bonds mines on International H&S environmental Reduce Valuing and liaison management intervention in managing commercial mining subsidence claims Provide guidance to Strictly enforce activities and mines on safer pollution emission progressively Inspection and working controls and raise dismantle market archiving of mine penalties to barriers plans including Safety training and encourage users to abandoned mines certification buy cleaner coal or introduce new clean Managing inherited Investigate fatal coal technologies safety and accidents and environmental expedite open Raise climate 121 Institutional and legal framework and policy liabilities from publication of change awareness abandoned coal reports and promote mines and protect methane emission the public from Gather and publish mitigation measures associated hazards mine non-fatal at coal mines accident statistics Central repository Liaise with MOH on for geological and occupational coal resource disease control information. Liaise with natural Mandate and gas exploration facilitate acceptance licensing authority of worker safety on CBM-coal mining representatives at interaction issues all mines 8.3 Reform needs The coal mining sector administration The effectiveness of municipal and lower can be substantially strengthened by level government is inhibited by rationalizing the allocation of duties and overlapping departmental functions and, responsibilities spread across NDRC, in some cases, inadequate manpower MOLAR, SACMS, provincial ETC and resources. MOEP. It can also be improved by better integrating the related functions in clearly defined departments to form a cohesive coal sector administrative organization as suggested in Table 8.3. 8.4 Recommendations The institutional structure of China's coal and to ensure their clear focus on mining sector has been undergoing primary objectives. reform for a number of years to reduce problems caused by overlap between MOLAR has various responsibilities departmental functions and conflicting relating to land use for coal mining with regulations, but difficulties still remain. A departments at local level and these cohesive and efficient coal sector should be consolidated at an operational administrative organization should be level under provincial land and established at central level to co- resources departments. These provincial ordinate rationalization and activities of departments should be equipped with provincial and lower level coal industry the necessary expertise to administer administration bureau and departments. exploration and mining rights, ensure The proposed department should be effective exploitation of coal resources, accommodated in an Energy Ministry if assess and collect royalties, manage such an institution was formed. subsidence claims, hold and apply restoration bonds, provide a public The roles of key Central Government repository for abandoned mine plans, ministries and administrations should store geological exploration information, also be clarified to prevent inappropriate and protect the public from mining intervention in coal industry activities related hazards. 122 Institutional and legal framework and policy lower level safety departments. Safety NDRC and MOLAR should separate inspectors should have the authority to coal mine production management and stop mining operations irrespective of coal resource administration functions mine type without referral to higher and delegate all operational authority in the event of serious non responsibilities to provincial level. compliance. Safety inspectors should be Provincial and lower level ETC coal- paid high salaries to deter corruption related functions should be abolished and facilitate recruitment of experienced and their non-overlapping functions and able staff. More staff are needed to merged into coal management ensure all mines can be regularly departments at the same level. inspected. The functions of SACMS should be clearly separated from coal The role of NDRC and State Energy mining management departments. Administration should be to provide oversight on behalf of the Government MOEP's powers to enforce and to undertake long-term strategic environmental protection laws and planning under a cohesive energy policy regulations in coal mining areas should with access to the technical and be strengthened and its resources statistical resources of provincial coal increased accordingly. This will involve departments. Coal mining sector capacity building in local environmental management should be delegated to protection agencies and the recruitment provincial government coal departments and training of specialist coal mine which have the resources to implement sector inspection and enforcement staff. and enforce policy. MOEP and its lower level departments Effective government mine safety should take a more active role in agencies in other countries are wholly inspecting major coal mine exploration independent of coal mining interests and and construction activities, and also of China should follow this example. any surface impact during operation SACMS should pass its residual coal where concerns have been raised in the production management functions from EIA or complaints have been made by the former Ministry of Coal Industry to a affected individuals or organizations. central coal coordinating department Local government should receive a including gathering, analyzing and proportion of any environmental fines to disseminating coal mine production and encourage them to support performance data provided by provincial environmental protection activities and level departments. This central coal to finance local awareness campaigns department should establish regular and on the benefits of environmental close liaison with both SACMS and protection. MOEP to ensure common aims of improving safety and protection of the China's safety and environmental laws environment respectively are being and regulations are reasonably well- effectively tackled. It should also ensure developed, but enforcement is still weak. that safety and environmental issues are A sustainable industry must become treated as paramount and not more responsive in its adherence to law compromised in any revised or new coal and regulations, especially safety and administration regulations. environmental and therefore it is important to establish a clear legal and SAWS and SACMS have already been regulatory framework. An effective, raised in administrative authority by the strongly enforced regulatory framework State Council, but their powers of is necessary to ensure that the full costs enforcement are still inadequate. of mining are borne by the China's coal SACMS should be more strongly and mines in respect of environmental transparently enforcing mine safety laws protection, work safety and social and regulations through provincial and responsibility. 123 Institutional and legal framework and policy Prescriptive regulations should be reviewed and where practical, abolished and replaced with performance standards. Provincial and lower level government coal department supervision and enforcement duties will be reduced allowing the regulatory authorities more time and resources to concentrate on fewer and more critical key regulatory issues. Thus, the administration system would become more effective. 124 Conclusions Chapter 9 Conclusions China's coal sector faces many · Allows foreign majority ownership of challenges but the Government has coal mines to attract FDI and shown determination in developing a technology transfer modern coal mining industry that will · Introduces a "bottom-up" approach to ultimately satisfy growing energy improving mine safety demands. · Streamlines coal industry administration, assigns clear, non The ability of China's coal mining sector overlapping roles to ministries, and to meet the nation's massive and establishes a coal industry increasing energy needs is determined management authority at Central by the availability of identified mineable Government level. reserves, exploration to prove new reserves, the production capacity of Strategic planning existing mines, construction of replacement mines and expansion of Long-term strategic planning of coal capacity, and a transport infrastructure mining sector development is essential if to complete the supply chain to the China is to meet its sustainability customer. Sustainable development aspirations. During the 11th Five Year requires a socially responsible and Plan (2006-2010), China intends to environmentally sensitive approach to produce 2.6 Bt of coal by 2010 of which both resource exploitation and supply 2.1 Bt is expected to come from large logistics. and medium scale mines and about 0.5 Bt from small mines (calculated In summary, a sustainable coal industry assuming 10,000 small mines with an will be market driven and this requires average production of 500 Ktpa). Half of that government: this coal will come from the very large coal enterprises (super-groups) of which · Relinquishes controls on exploration 6 to 8 will be producing over 100 Mt coal and mine development quota per year each and 8 to 10 will each be · Should not introduce any special producing over 50 Mt per year. The policy incentives for CTL Government plans to cap coal · Promotes R&D into UCG methods for production capacity at 2.6 Btpa, but exploiting deep coals that are industry observers are predicting a uneconomic to mine conventionally demand of 3 Bt or considerably more by · Replaces inflexible, prescriptive, 2010. By this time small-scale mining regulatory standards with will have limited capacity for expansion performance standards thereby removing the ability of the coal · Facilitates investment in enhanced mining sector to rapidly switch in transport capacity to match coal production to meet shortfalls. freight demands Restrictions to market competition from · Allows equal competition between overseas suppliers must therefore be private and State-owned mines lifted to encourage increased efficiency · Exposes China's coal mines to in domestic coal mines and the free flow foreign competition by abolishing of imports. import and export duties · Ensures full costs of production are Rather than set production caps and met by all mining companies then adopt a "stop go" strategy, the · Establishes rational small mine Government of China should be approval criteria for remote areas to establishing market conditions in which replace arbitrary minimum capacity the coal price moves in response to criterion supply and demand variations. 125 Conclusions Regulations and enforcement should be should be developed to extend China's aimed at ensuring that safety and coal resources. To ensure smooth coal environmental performance standards supplies, new mines must be are attained. constructed, imports gradually ramped up and transportation systems expanded The full environmental and social costs commensurately with internal coal must be carried by the mining distribution needs. Government policy to operations, otherwise the Government concentrate mining on fewer longwall will be faced with growing future faces will make coal output more liabilities for pollution and loss of water sensitive to both geology and accidents. resources, degraded land and worker More detailed exploration and improved disease which will have a serious impact safety measures are therefore on an economy that will become fundamental to the control of domestic strained by increasing scarcity of energy coal supply risks. Without these resources. improvements overall operating costs will increase which will have an impact China cannot rely wholly on its own coal on price stability. resources to supply the expected rise in demand because of geographical, High grade management and skilled transportation and development technical staff must be recruited, trained constraints and should plan to and retained by the mines to ensure that accommodate increased imports. This the performances of mining assets are will sharpen competition, extend the maximized for improved efficiency. This limited life of China's coal reserves and is recognized by the mining companies, integrate China into the global coal but the market for high caliber market. The strategy should recognize graduates, management and technical the finite life of the currently proven coal staff is competitive and mining is not reserves and create conditions which viewed as the most attractive career. will encourage more investment in the exploration of coal resources and Coal market and competition development of advanced technologies for recovering energy from coal seams The fundamental market principle that that are either inaccessible to should be recognized by the conventional mining or of too poor Government is that mining companies quality. Without a long-term strategic should be allowed to pursue their own action plan for coal supply, China's coal self interest, but be forced by regulations reserves could be exhausted well before to take into account the adverse impact the end of the century. Fundamental to of their activities on society and the the strategy are sustainable mining environment. practices; otherwise the environmental fabric of China will be irreparably The performance of a market based coal damaged with serious impact on the mining sector in which the Government inhabitants of mining areas, and expended its efforts on strengthening ultimately the national economy. regulatory controls of the impact of mining, rather than invoking ineffective To ensure sustainability of coal supply, central planning techniques, would be reserves must be extracted using more predicable and compatible with modern, safe and efficient mechanized achieving its aims using tried and tested mining methods without having an policy tools that have been amply adverse impact on the social and demonstrated in developed coal mining environmental fabric of the country, countries. especially water resources. Best use must be made of finite coal resources The Government of China includes coal and technologies for extracting energy mining as one of its strategically from coal below feasible mining depths important sectors to which state capital should be channeled. The Government 126 Conclusions insists on maintaining State control underlying causes, progress has been despite outwardly encouraging slow and inconsistent and further diversified ownership through share government action is required. The holding reform, strategic investors, objectives of the coal mining sector are restructuring or listing. The ownership focused on meeting energy demands structure of the large former key State- first, with too little consideration of the owned coal mining enterprises inhibits human and environmental cost, entrepreneurial activity and the trend is especially among the small private, towards domination by a few large locally and community owned mines and corporate entities under provincial and this situation must be changed in order Central Government control with public to develop a sustainable coal mining and private sector participation limited to sector. nominal shareholding. Inter ministerial and inter departmental policy conflicts Criteria that define a modern, safe and and disparate aims are distracting senior sustainable coal mining sector should be decision makers from the core business encapsulated in a legal and regulatory of management and developing long- framework and include competitive term sustainable strategy. access to reserves, efficient and economic extraction (including resource The large, consolidated mining group protection), enforced safe working companies now have the corporate, practices, acceptance of environmental financial and management resources to protection responsibilities, training, guide investment in the business to recruitment and retention of skills and optimize revenue and it is an opportune expertise. time to relax too rigid, largely ineffective government planning controls and take In moving towards a sustainable coal fuller advantage of market forces. This mining sector the key social and will place more reliance on market- environmental coal mining sector issues based instruments for regulation of that need to be addressed by the sector activities. Government are miners' health, safety, welfare and employment; mine closures; As the Government of China has not yet land subsidence; mine waste; water declared its willingness to relinquish its pollution and environmental problems majority ownership of a large part of the created by past mining. There is a nation's coal mining capacity, and historical legacy of environmental continues to intervene with planning degradation associated with past mining. controls, inherent inefficiencies are Restoration of abandoned mine sites, inevitable within the coal industry and waste tips, polluted water courses and will remain unless further reforms are subsided land will involve massive undertaken as recommended in this government expenditure, but future report. problems can be prevented by ensuring mines carry the true costs of controlling Safety, health and environment its negative impact. Environmental, safety, health and social performance of coal mining enterprises Environmental priorities in China's coal is of concern to the Central Government. mining sector that require government Substantial policy has been introduced action are: in an attempt to improve protection of 1. Greenhouse gas emission the environment from mining induced reductions damage, raise health and safety conditions in mines and to provide 2. Groundwater protection and employee health, accident and pension water conservation to ensure protection. However, due to ineffective civil and industrial water supplies enforcement through supervision and can be sustained monitoring and failure to address 127 Conclusions 3. Land protection, reclamation and of agricultural land which is also re-use to prevent degradation being severely eroded by and further mining-induced loss urbanization. 128 Appendix 1 Underground coal gasification (UCG) Appendix 1 Underground coal gasification (UCG) UCG exploits the energy content of coal stage method. Under-surface while avoiding the environmental gasification is an extension of mining in problems at the surface associated with which gasifiers replace working faces coal mining, disposal of mining waste and are controlled independently from and coal combustion. Moreover, there underground to ensure optimum are no methane emissions when this performance. Underground access is technology is used. The UCG process maintained at all stages of the operation. involves injecting water/steam and air or The long tunnel method involves oxygen into a coal seam. The injected controlling a mined gasifier from the gases react with coal to form a surface through a series of surface combustible gas which is brought to the boreholes. This method can produce an surface and cleaned prior to utilization. intermittent 12 to 14 MJ/m3 of gas from The use of a combined cycle plant will its two stage process compared with 4 to provide high efficiency power generation 6 MJ/m3 in an air-blown under-surface and the CO2 could be concentrated for gasifier. Product stability is difficult to sequestration. maintain without the use of costly oxygen and performances are Large-scale, shallow seam-based unpredictably variable in Chinese schemes have operated in the Soviet gasifiers. Union for more than 40 years. Early research into UCG concentrated on Optimized reaction conditions in deep, coals at relatively shallow depth. These drilled systems could produce gas with a projects mainly involved the use of heat value of 16MJ/m3. Benefits of deep existing and purpose made mine entries UCG gasifiers, compared with shallow and underground infrastructure, shallow installations, additional to higher gas boreholes or a combination of the two quality, are elevated pressures, higher approaches. Recent work in the USA, mass flows and hence greater efficiency Europe and Australia has concentrated of energy transmission to the surface. on the exploitation of UCG in coal This technology, if commercially viable, seams accessed using advanced guided would provide a cleaner and lower drilling techniques (Creedy et al 2001). greenhouse gas emission route for While all the technologies needed for power generation and, by allowing UCG are technically feasible, no long- exploitation of seams below feasible term commercial operations have been mining depths, has the potential to established outside the former Soviet substantially extend China's recoverable Union. China has undertaken many coal energy resources. UCG projects, but relies on mining methods for creating underground The use of advanced gas cleaning gasifiers which will not be feasible for techniques at a UCG plant could enable large-scale exploitation of deep coal high sulfur coal seams to be exploited seams. for power generation without causing air pollution. The technology being Many UCG trials have been carried out developed in Australia, the UK and by government-financed research some other countries involves the institutes in China where the technology application of drilled, safe, deep UCG has been applied to recover energy from technologies linked to combined-cycle residual coal pillars in mined areas, thus power generation plants. UCG combined increasing resource recovery. There are with power generation provides a zero two distinct UCG approaches in China: methane emissions alternative to the under-surface gasification method conventional coal mining and a and the long tunnel, large section, two- significant reduction in greenhouse gas 129 Appendix 1 Underground coal gasification (UCG) emissions, possibly by as much as 50 percent, over current mining and coal- fired power plant operations (Creedy et al 2001). 130 Appendix 2 Example of selling mining right by auction Appendix 2 Example of selling mining right by auction An announcement for transfer of (2) All the participants, enterprises exploration and mining rights by (organizations) should go through bidding formalities for bidding, by holding a copy of business license, assets evidentiary In accordance with the relevant laws and materials; legal agent certificate, original regulations, approved by the and copy of ID of legal agent or a letter Department of Land & Resources of of authority of the legal agent, or power Heilongjiang Province, it is intended to of attorney of the legal person, an transfer the exploration rights of Jixi original and copy of the principal (if the Hezuo (cooperative) coal mine (part of bidder is a natural person, holding an the mine) of Heilongjiang Longxing original of ID). International Resources Development Group Co. Ltd. and Qifeng No. 2 District 4. Time and place for listing of Qitaihe municipality and the mining application right of Jixi Pingyang mine. The extent of 5. Time and place for listing the mining area transferred and the 6. Miscellaneous items contents of relevant issues about (1) For type of payment, the auction will include: relevant stipulations about the auction 1. Introduction of mining right, the and issues not mentioned please see initial price and cash deposit for auction the relevant transfer document obtained 2. Introduction of exploration right, in making the application. the initial price and cash deposit for (2) The cash deposit will be auction returned to those not getting the bid 3. The scope of bidders within five working days after completion (1) All companies, enterprises and of listing (not including the interest). natural persons (except being stipulated by other laws) within and outside Heilongjiang Province Land Resources People's Republic of China may take Purchase and Reserve Trading Centre, part in auction (The bid can be bought June 26 2006. individually or collectively). 131 Appendix 3 Safety management and culture Appendix 3 Safety management and culture Introduction This Appendix examines the role of It is all too easy to place the blame for safety management, and the importance accidents solely on management. They of a culture of safety, in improving have an important role to play, but workplace safety in the coal mining effective safety management also industry. requires the active participation of the workers. There is strong evidence that A responsible employer will recognize involvement of the workforce, both in the moral, legal and financial necessity safety committees and as workers safety of ensuring the safety of employees. The representatives, can reduce workplace benefits to a company of improved injuries significantly, sometimes by more safety standards can be substantial and than fifty per cent according to some include: research. The failures leading to any workplace accident arise as a result of · Fewer working days lost due to human frailty involving both accidents management and workforce. To provide · Increased profit the necessary level of protection the · More secure and motivated following elements are required: workforce · An effective safety management · Better image to public and system customers · A safety culture which permeates both management and workforce. In most countries, health and safety laws have been enacted and regulations Effective safety management systems implemented to protect the safety of the facilitate the safe integration of humans workforce. Inspection and enforcement and work-related processes. Human by a trained inspectorate monitor error is unavoidable so safety compliance. However, a legal management is designed to minimize requirement for safe working practices the consequences of human failure and and the threat of prosecution does not take account of the notion that the more necessarily guarantee the law is obeyed. severe the consequences of failure, the greater the importance of safety Failures to manage safety adequately management. arise in both developing and developed countries although, in general, the A safety management system, as consequences are less severe in the required by the UK Health and Safety latter. One reason for this is that there Executive and used as a framework by are fewer men underground due to UK mining companies, contains the greater mechanization, while another following elements: may be that non-compliance with safety rules occurs less frequently. · Policy ­ a definition of what needs to be achieved and the strategy for The challenges are also greater in achieving it. developing countries where accident · Organization ­ a management rates may be exacerbated by: structure which identifies who is · responsible and who does what. Obsolete equipment · · Planning ­ identification of risks, Lack of management skills · probability of occurrence and their Absence of a safety culture potential impact (risk assessment), · Poor rewards and design of control measures to · Shortage of investment in modern reduce risks to an acceptable safety equipment level. Identification of suitable, 132 Appendix 3 Safety management and culture safe technologies to do the job environment, use of safety equipment and provision of technical support and first-aid techniques. Once from experienced specialists. individuals recognize how they can help Definition of operating rules and each other to work more safely, the procedures (safe methods of necessary cultural change has started to working). take place. · Monitoring to ensure the effectiveness of the safety Safety culture in the workplace will also management system. be reflected by the safety culture in · Audit and review to assess society. Greater awareness of personal whether procedures are working safety in everyday life, such as the and, if not, then how to amend wearing of seat belts in road vehicles, is them. a sign of a maturing safety culture. Factors conducive to an improving Safety culture workplace safety culture are: A safety culture will only develop once · Changing social attitudes individuals recognize and accept some · Improving living and working responsibility for the safety of conditions themselves and colleagues. · Increased responsibility for everyday living The attitudes of individuals to safety can be influenced by a variety factors. These The modern approach to safety could include a macho culture, social education is to use interactive teaching problems, poor living conditions, lack of methods and positive reinforcement of hope for future improvement, low value principles, that is, to concentrate on of life, lack of self esteem, lack of rewarding improvement rather than recognition by seniors, ignorance, poor highlighting failure. In a country such as education, and inadequate training. China which is developing rapidly, Attitudes will also depend on parental external assistance is needed to influence, education, training, leader and accelerate training in safety practices peer pressures. and culture. The most effective help would be to train the trainers and the US Job related pressures may also play a and Australian governments have part, especially in developing countries funded suitable training schemes, while due to: UNDP and ADB have also initiated mine · Increased mechanization safety projects. · Unfamiliar equipment · Conclusions Increased production · Reduced staffing level The basic principles of safety · Cost saving pressures management - the systematic control of · Difficult mining conditions risk - can be applied to all workplaces. However, safety management will only Various approaches can be employed to be effective where a safety culture exists raise awareness of safety issues and throughout all levels of the industry, help to change cultural attitudes. These including the senior management. include introducing incentives and rewards for accident free achievements A safer workplace can be achieved by a and for safety suggestions, worker combination of: involvement in safety competitions and · Suitable technology to perform the dissemination of safety promotional job required material. Training is of paramount · Compliance with all relevant laws, importance. This could include risk regulations and official guidance assessment techniques, improving the understanding of the workplace 133 Appendix 3 Safety management and culture · Regular inspection (by the statutory body, management, safety professionals and workers representatives) · Firm enforcement of rules by management and laws by the regulatory authority · Training for safe working · Responsibility (a safety culture) 134 Appendix 4 Role of mineworker safety inspectors (after Feickert 2007) Appendix 4 Role of mineworker safety inspectors (after Feickert 2007) United Kingdom: The role of `workmen's inspector' was recognized Australia: In Australia, the legislation is as early as 1872. By 1911 the UK had a similar to the UK but is applied at state well-structured system of statutory rather than federal level. The following is safety inspection, a statutory role for pit taken from the revised proposals for safety supervisors (deputies) and a New South Wales (NSW), although most statutory role for worker inspectors who of the provisions only slightly modify were elected by the workforce, through existing law. Check inspectors are the union representing the majority of located at both site level and district the workers. Candidates must have five level. The site check inspectors are years' experience as miners. As elected by the workforce. Candidates required by law, after their regular safety must have three years experience at the inspections, a copy of their statutory site, or at a similar site. Electrical site inspection report is sent to the check inspectors are also elected. The Government Mines Inspector covering employer must assist the check their mine. The role of workmen's inspector to carry out his inspection inspector, which was strengthened responsibilities and allow sufficient time further in Section 123 of the Mines and to do so during normal working hours. Quarries Act, 1954, became a model for The district check inspector is paid and general worker safety representatives. full-time. The site check inspector has This was embodied for the other access to the Mines Inspector and workplaces in the 1977 Safety reports to him through the district check Representatives and Safety Committees inspector as well as to the manager. If Regulation and the 1995 Health and the site check inspector reports a Safety Consultation with Employees dangerous occurrence the operator must Regulations. This legislation is, in turn, immediately inform the Chief Inspector. supported by the EU Framework The district check inspector has the Directive on Safety and Health 1989 and power to suspend operations in event of its linked Extractive Industries Directive operator non-compliance with the law 1992. In addition, when the UK coal leading to danger to the workers. The industry was nationalized in 1946, the site check inspectors must undertake a legislation required the National Coal course of training in occupational safety Board (NCB) to consult the miners' and health that is accredited by the unions on operational questions and on Minister. The NSW Department of health and safety. A safety consultation Primary Industries covers the cost of the system was built up from the mine level training. to the national level based on safety committees. The National Union of New Zealand: Until 1992 there were Mineworkers employed qualified mining workmen's inspectors, similar to those in engineers, with extensive safety and British mines. The Health and Safety in production experience. The NCB and Employment Act 1992, as amended in Inspectorates were professionalized. 2002 and 2003 replaced them with With such a safety organization the worker safety representatives at the accident rate fell rapidly from 1946 to the same time that the latter were point where the UK could claim to have introduced throughout NZ workplaces, in the safest coal industry in the world. many for the first time. The Act lays out Training for workmen's inspectors was the rights of worker safety organized by the union's safety representatives. These must be elected engineers, in co-operation with the NCB by the workers themselves, with any Safety Department and the Mines unions organizing them involved in the Inspectorate. election. The overall approach to health 135 Appendix 4 Role of mineworker safety inspectors (after Feickert 2007) and safety is based on worker introduced, 13,000 safety participation, with the objective of representatives have been trained. securing an agreement between workers Trained representatives can make and the management, via a trade union. recommendations regarding safety to Mining is covered by these their employers, who have a legal duty arrangements. Worker safety to either adopt the recommendation or representatives must be trained on a explain why they will not do so. Worker course which is certified by the Minister. representatives can also issue hazard They have the right to undertake two notices and can advise workers to days paid training. The Council of Trade refuse dangerous work when faced with Unions' Course is the certified course imminent danger. commonly used and since the Act was 136 Appendix 5 Comparative environmental protection case study from Australia Appendix 5 Comparative environmental protection case study from Australia A case study has been undertaken into · being proactive in environmental the environmental impact and controls of management and community coal mining in the Hunter Valley of New engagement; and South Wales (NSW), Australia as an · using sound mine planning example of what China should strive to based on good science and achieve, and as illustrative of costs and engineering administrative mechanisms. The Hunter Valley region is one of the largest coal There is no doubt that the environmental producers in Australia. Surface mining is and safety controls that the Australian dominant with around 80 percent of mining companies operating in the production occurring by open cut Hunter Valley have implemented, are methods. This type of mining is large- among world's best. However, such scale and results in extensive efforts and excellence come at a environmental impact, particularly loss of significant cost. It is estimated that the visual amenity, dust, noise, surface and annual cost of environmental ground water. Although underground management measures at a typical mining is less visually intrusive, it adds Hunter Valley surface mine is around another dimension to the environmental AUD$4 to $7 million. Due to the large issues, in particular the impact of tonnages mined, this translates to subsidence on roads and other public around 30 cents per raw tonne mined. infrastructure as well as private property. For underground mines, it may be around A$2 to 3 million, with similar The Hunter Valley mining industry co- costs per tonne. However to continue to exists with other land users, including operate in a region in which mining agriculture, horse-breeding and tourism. competes as a land use with wine Wine production in particular has grown growers, horse breeders, hobby farmers in the area in recent years and conflicts and tourists in general, this is the price between both industries are occasionally that must be paid. resolved in the courts. Opposition to mining from other sources is also Companies spend a significant growing. A recent court judgment for proportion of their budgets on health and example found against the mining safety prevention also. But when one company concerned on the grounds that considers that a single fatality can cost the global impact of climate change from the company between A$3 and A$10 a new open cut operation was not million (about US$2.5m to US$8.3m), considered sufficiently in the prevention strategies are a good Environmental Impact Assessment. business strategy. The case studies illustrate that mining Despite the initiatives, mining companies can co-exist with competing and face increasing challenges to gain theoretically incompatible land uses by: community and political support for their · working within a robust activities. Furthermore, recent court regulatory environment cases involving both environmental and · adopting voluntary, self- safety issues have damaged the regulatory initiatives such as industry's credibility and created Codes additional costs and distractions, at a time when there is enormous global demand for its products. 137 Appendix 6 A recommended mine planning approach to control subsidence impact Appendix 6 A recommended mine planning approach to control subsidence impact The subsidence impact planning landforms procedures developed by the former British Coal provide a model that could Village re-location may be necessary adopted by China's coal mines (Wilshaw where the coal seam is at very shallow D, Coal Mining Environmental Impact depth (less than 100 m), the extraction Study, Shanxi Province, China. Wardell height is more than 2 m and/or where Armstrong LLP on behalf of the World the village is a small community and Bank, 31 May 2007) relocation is feasible. Subsidence impact should be Having implemented mining activities a considered as an integral part of the standard code of practice should be mine planning procedure. With this in applied to deal with the remediation of mind a `Subsidence Sensitivity Plan' damage. Emphasis should be based on should be prepared for each mine repair rather than just compensation. identifying areas of concern. For Repairs and treatment should be example, built up areas should be undertaken as soon as possible. delineated along with major rivers, cultivated land, fault outcrops, service Where services are disrupted, for routes and major aquifers. Thus, the example whereby villages lose water potential impact of subsidence on each and / or electric supplies, these should of these features can be assessed. be repaired as soon as possible. A report should be prepared for each Fissures should be repaired by capping proposed mine panel well in advance of or plugging and where necessary re- the mining event (e.g. 2-3 years in grading of the land profile to reinstate advance). Specific consideration should the land to its former use. Un-repaired be given to: fissures represent a hazard to the public · and render land permanently incapable assessing the potential resultant of being farmed. ground movements · identifying any significant Where there is a perceived risk of a environmental / social landslip being induced which could have consequences a serious impact on properties or · appraising the likelihood of high infrastructure, consideration should be subsidence costs given to carrying out works in advance of the mining (preventative works) to Where workings are required to be mitigate such effects. carried out beneath sensitive areas such as buildings and bodies of water, then Where watercourses are affected by consideration should be given to fissuring then remedial measures should minimizing the subsidence impact by: be carried out to contain flows within the · limiting panel widths to 50 m to river channel and prevent flows into the 100 m underlying aquifer. Where such fissures · limiting the height of coal are left unattended there can be serious extraction to 1.5 rfm affects on the downstream environment · adoption of a partial extraction which can result in pollution of the system of mining to produce a aquifer. more uniform subsidence profile · carrying out preventative Destruction of aquifers, in a dry climate, measures to surface structures / appears environmentally unacceptable. However, in view of the mining 138 Appendix 6 A recommended mine planning approach to control subsidence impact parameters such problems may not be not necessarily be a permanent repair, able to be avoided. The problem is not but suffice to enable continued and safe simply associated with the provision of use of the facility. alternative water supplies as this does nothing to reinstate the aquifer. In one instance it was reported that Alternative mining practices appear to pillars of protection had been provided be the primary solution to this problem. for a village but small mine operations and illegal mining had taken place Where crop yields are affected then causing damage to the properties in the farmers should be properly village. Such operations need to be compensated. If land is rendered regulated, otherwise coal reserves are permanently incapable of farming then being sterilized for no benefit. the farmer's loss should be quantified accordingly. It is not sufficient to offer In the UK, under the former nationalized farmers limited compensation and coal industry, internal procedures thereafter leave them to determine their required mine proposals to be referred own destiny. to senior management when subsidence costs were expected to exceed 3 Significant damage to highways, percent of proceeds. This criterion affecting traffic flows, and residential allows mine managers to make properties should be considered as decisions and manage subsidence `emergency works' to enable their issues when costs are within normal continued function. Such works would bounds. 139 Appendix 7 Coal industry administration in Shanxi Province Appendix 7 Coal industry administration in Shanxi Province Authorities at provincial, municipal and dangerous chemicals safety supervision, county levels have coal industry rescue office and a personnel training administrative responsibilities. However, centre. coal administration agencies at municipal and country levels have Coal Industry Bureau of Shanxi: In different operating roles from those at September 2000, the provincial provincial level. department of coal industry was reorganized as the Shanxi Coal Industry The three main coal sector Bureau. Its main responsibilities are to administration departments at Shanxi develop coal industry strategies and provincial level are the Coal Mine Safety plans, advise on comprehensive Supervision Bureau, Coal Industry utilization and restructuring, formulate Bureau and the Work Safety Supervision development policies and regulations, Bureau. supervise the law, regulations and technical standards, supply chain market Additional coal sector functions are orientation, promote reforms, close undertaken by the Provincial illegal mines, regulate licensing, gather, Department of Land and Resources, the analyze, disseminate coal industry Development and Reform Commission, information and manage government the Economic and Trade Committee and subsidies and development funds. the State-owned Assets Supervision and According to the Notice of Duties and Administration Commission. Manning by the provincial government, the Provincial Bureau of Safety The Shanxi Coal Mine Safety Supervision comprises the following Supervision Bureau was founded in a divisions: office, planning and government reform of 2000 by re- development, industry administration, designation of the Coal Industry Bureau operations, accounting and personnel. and vertically integrated under the State Its many tasks are undertaken by 32 Bureau of Coal Mine Safety Supervision. staff members. According to the regulations Provisions on Coal Mine Safety Supervision Shanxi Provincial Land and Resources System issued by the State Council, its Department: Shanxi Provincial Land and duties include dealing with illegal mining Resources Department is responsible practices, licensing and certification, for land and mineral resources reviewing of designs of safety facilities administration. Its main responsibilities and completed projects, training and the are: geological resources plans and investigation of accidents. It has a staff management, resource protection, of 75. reviewing plans at municipal, county and township levels and approval of The Provincial Safety Work Supervision exploration and mining right licenses. Bureau is affiliated to the provincial Shanxi Provincial Land and Resources government and its duties include Department has 15 agencies, including inspecting local coal mines, enforcing those involved in coal industry regulations, closing mines that do not management, mineral resources comply with safety regulations, exploitation and management division, investigating accidents and supervising mineral resources reserve division, the training of miners. There are 35 staff geological environment division and members working in various divisions, geological exploration division. At namely office services, policy, planning present the department has 2,749 staff and technology, safety work co- members and 12,741 employees with ordination, coal mine safety supervision, over 900 management staff. 140 Appendix 7 Coal industry administration in Shanxi Province Provincial Bureau of the Coal Industry in Shanxi Provincial Development and charge of safety supervision of coal Reform Commission: Shanxi Provincial mines and also issuing certificates to Development and Reform Commission heads of coal mines and special is in charge of formulating economic and operators. social policies of the province, economic reform, macro management of the coal As a consequence, the bureau added industry and approval of coal mine the following divisions to its structure: construction projects. The energy general affairs, safety supervision, division is responsible for proposing implementation, rescue, environmental energy strategies and policies, and for protection and training. The number of setting energy development plans. It is divisions increased from 6 to 13 and also in charge of transportation and staff members from 32 to 68. sales of coal. Coal administration agencies at Shanxi Provincial Economic Committee: municipal and county level Shanxi Provincial Economic Committee is part of the Provincial Government. Coal mine safety work supervision The committee is responsible for agencies: All of the 11 cities in the supervising the economic operation of province established coal mine safety the coal industry, coal production, supervision subdivisions which are transportation, sales and issuing of responsible for the local coal mine safety licenses. It has 15 divisions, of which the supervision. These have a total of 220 most relevant to the coal industry is the staff members. energy division. This division has responsibilities which including devising Safety supervision and administration energy base construction plans, coal agencies and coal industry agencies: In production, transportation and sales 2001, all the 11 cities organized safety coordination and adjustment, setting supervision bureaus based on the coal special fund management policies, former coal industry bureau. Except for organizing coal fairs and setting annual Taiyuan and Yuncheng, all the other target for coal sales, and reviewing nine cities retained the title of coal operation qualification and issuing industry bureau. licenses. The safety supervision bureaus in each State-owned Assets Supervision and city are affiliated to the municipal Administration Commission of Shanxi government. Their main duties include: Provincial Government: The State- supervision of the enterprises' owned Assets Supervision and implementation of the law, regulations, Administration Commission of Shanxi policies, standards and development Provincial Government is affiliated to the strategies; technology improvements; Provincial Government. Its duties production and operational practices; co- include supervising key state-owned ordination of closure of illegal coal coal enterprises' state-owned assets, mines; approving newly opened mines; and reform and management. and reporting to higher authorities. The compositions of safety supervision In Shanxi, there are problems in the coal bureau and coal industry bureau differ administration agencies arising due to from city to city. Generally, they have overlapping of both agencies and duties such divisions as coal industry which in turn causes weakening of the management and safety supervision administration. In July 2007, according with numbers of staff ranging from 30 to to the policies of the state council, the 90. Government issued the Notice on the Adjustment of Coal Industry After 2005, the organization of safety Administration. This procedure put the supervision and coal industry agencies 141 Appendix 7 Coal industry administration in Shanxi Province in some cities changed. All the 11 cities, department has many problems arising except Yuncheng, established a coal from overlapping and conflicting duties, industry bureau. Six coal industry especially involving the three former bureaus were formed separate from the bureaus. safety supervision agencies while four coal industry bureaus shared the same There are agencies with overlapping staff with safety supervision agencies. duties in the Shanxi coal mine safety Ten Coal Industry Bureaus at city level supervision bureau, safety supervision are under the local government. bureau and coal industry bureau all Xinzhou, Linfen, Shuozhou, Lvliang, which have supervision responsibilities. Taiyuan and Datong Coal Industry Bureaus belong to the ETC, but with In July 2007, the 11th circular issued by independent operation. Jinzhong, Shanxi adjusted the coalmine safety Yangquan, Jincheng and Changzhi Coal supervision system. Accordingly, the Industry Bureaus answer to the ETC, but coal mine supervision duty of the safety without independent operation. Coal supervision bureau should be industry bureau at city level normally transferred to the coal industry bureau have 10-20 staff members with 5-6 inner making it solely responsible for agencies. production, construction and safety of all mines. Both Shanxi coal mine safety Coal administration departments at supervision bureau and the provincial county level are mainly coal industry coal industry bureau have a safety bureaus and safety supervision bureaus. supervision office and a training center. They are normally operated together, thus sharing the responsibilities of Shanxi Coal Mine Safety Supervision safety, planning, technical instruction Bureau and Shanxi Coal Industry and co-ordination. Most of the counties Bureau have overlapping duties in coal also established safety supervision mine safety management and coal offices at coal producing townships. industry administration regarding the Coal management departments at issue and examine and approval of county level differ in composition and several licenses. manning. For example, Qinshui coal industry bureau and safety supervision According to the Coal Law, coal bureau has four departments, one office, production license regulation, the issuing one team and three centers with 69 staff of coal production licenses, licensing the members. Eight coal producing coal mine head of coal, training and townships have established safety issuing special work permits is the supervision offices, with 43 staff responsibility of the coal administration. members and 61 supervisors stationed in the coal mines and 24 gas According to the Work Safety Law, coal supervisors. mine safety supervision regulation and the 79th circular, Shanxi coal safety In 2007, the Provincial Government supervision bureau is responsible for the issued a notice requiring all the 11 cities issue of certificates of coal mine safety to establish coal industry bureau and work, coal mine head safety, and special adjust their duties accordingly. However, staff. The Coal Mine Head Certificate to date reorganization has been slow. and Coal Mine Head Safety Certificate are identical in effect and therefore Problems with coal administration represent unnecessary duplication. agencies at different levels The existing administrative system In view of the above problem, in July comprising Shanxi coal mine safety 2007, Shanxi Provincial Government supervision bureau, Shanxi coal industry transferred the responsibility of both bureau, Shanxi safety supervision supervision and the appraisal of coal bureau and Shanxi land and resources mine head from the work safety 142 Appendix 7 Coal industry administration in Shanxi Province supervision bureau to the provincial coal industry bureau. This represents a positive move towards reducing the complexity of Shanxi's coal mining administration. The overlapping duties have affected the efficiency of enterprises. Too many certificates are needed for enterprises and they are only applicable for a limited period which means that enterprises have to start applying for the next certificate almost immediately on being issued a new one. The enterprises cannot operate legally unless all certificates are extant. Some coalmines at township level receive as many as 1000 documents each year which the small enterprises have difficulty in understanding and complying with. Such an avalanche of administration is unreasonable, representing a high burden of administrative cost to mines and also results in excessive and wasteful administrative costs to local governments. Coal mine safety supervision department's duties are extended to industry administration which effectively make it both the enforcer and supervisor. This is especially the case of the five coal industry administration departments and safety work supervision departments which share the same staff. 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