Vietnam Coal Mining: A Bright Future Ahead

Reblogged from Vietnam Stocks, Market Analysis, Investment, Bonds:

Vietnam is a country which is rich in natural resources. Among them, oil and coal are the most important resources. Oil is being exploited by the PetroVietnam state monopoly while Vinacomin is the state owned giant that is in charge of the exploitation of Vietnam’s mineral and coal resources.

The coal found there are mainly anthracite coal and is ideal for the production of electricity.

Currently, the country faces an acute shortage of electricity. This will have to be addressed by building more hydro-power plants and coal fired power stations. Among these, coal fired power stations have the most potential.

For Petrovietnam alone, the company has already 5 coal-run thermo-power plants under construction. Vinacomin, in addition, also have additional coal-fired power plants. Just this year alone, Vinacomin will put into operation 2 additional coal-fed thermo-power plants, namely the Mao Khe Thermo-Power Plant and Nong Son Thermo-Power plant.

All these will generate a tremendous demand for coal. In anticipation of this increased demand, the government had already raised the coal export tax to 20% from 15% as of last year and it is anticipated that further increases will be likely as the local demand for coal increases.

Currently, most of the extra needs for coal is being met by importing coal from Indonesia and Australia. However, this avenue look increasingly difficult. Indonesia is considering imposing a heavy tax on coal exports which will likely drive up the price of coal significantly. In addition, Vietnam will have to compete with India, China and especially Japan for the import of coal from Indonesia and Australia.

Japan’s Fukushima Nuclear Plant accident in March 2011 means that alternative sources of electricity generation would have to be found quickly and coal is one of these alternatives.

Economics of Coal Mining in Vietnam

Vietnam has about 52 active coal mines and all are majority owned and controlled by the state owned Vinacomin via the Coal and Mineral Corporation (TKV). TKV almost completely controls the coal mining companies in every aspect of their operation, from the amount of coal produced to the price they sell the coal for.

Vietnam Coal Mine

TKV gives every coal mine a quota on the amount of coal that they would produce evey year and the price they sell to TKV is also determined by TKV after a “negotiation”. How TKV determines the price for the coal largely is from the production cost of the mine. Therefore, TKV pays a higher price to less efficient mines and mines which are more difficult mine. The profit of coal mining companies is fixed at 3% of the promised cost on paper.

If the mine experiences cost overruns (e.g. due to fuel cost increases etc.), TKV will usually compensate the mine for this extra cost. However, while TKV usually compensates mines quite promptly, delays are known to occur. A good example was what happened in September last year. Due to the tardiness by TKV in compensating for cost increases, many mines experienced losses.

As a result of this control, TKV controls the revenues and profits of every coal mine.

Vietnam’s Coal Reserves

Red River Delta, “Sông Hồng”, Vietnam

The majority of Vietnam’s coal reserves lie beneath the Red River basin. It is estimated to have 20 times more coal than Quang Ninh, currently the largest coal mining area of Vietnam. However, according to preliminary geological survey results, this coal lies thousands of meters underground and covers a vast area of 3,500 square kilometers, stretching from Hanoi to Thai Binh via Hung Yen, Hai Duong and other localities.

To exploit this vast coal reserves would require massive investment and foreign technological expertise. In addition, the environmental costs will be incalculable. Hence, I believe that for the present moment, it will not be feasible to exploit this reserve.

At present, the largest coal mining area remains that of Quang Ninh.

Quang Ninh Open Cast Coal Mine

The current listed coal mines are all based in this area.

However, as the coal mines are generally open cast mines which generate a lot of air and water pollution, the coal is currently being mined at a huge environmental cost. In addition, the open cast mines are fast being depleted. As a result, Vinacomin will gradually shut down the open cast mines of Nui Beo, Coc Sau, Deo Nai etc and increase the exploitation of underground coal mines.

The current listed underground coal mines are only Mong Duong and Ha Lam Coal.

Raising of the Coal Price for Electricity Generation

Last month, the government approved a plan propopsed by Vinacomin to raise the coal price. The magnitude of the raise is currently unclear but it is likely a significant increase.

Currently, because Vinacomin purchases the coal from mines at a fixed price which is negotiated, this price increase will only trickle down to the coal mines gradually.

Notwithstanding this, coal mines are likely to get more for the coal they sell to Vinacomin.

With increased volumes and a higher price for coal, Vietnam’s coal miners will see better times ahead.





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