Transport problems are causing three-week stockpiles of coke in some plants.

Concerns have also been raised over a potential oversupply of the raw material because of rapid production expansion.

“Due to insufficient rail transportation, stocks in most coke factories have piled up for three weeks,” said one manager from China Coal & Coke Holding Ltd, one of China’s major coke producers. “Only the big steel factories are receiving sufficient supplies.”

The State Council indicated that most railways have been supplying thermal power plants in recent weeks, leaving limited capacity for delivering other commodities. The government is worried that insufficient coke supply could force power generators to stop operation, which would intensify already severe electricity shortages in summer, the peak consumption season.

Insiders said some coke producers had shifted to trucks to supply the steel mills on short hauls, but the amount was quite limited because the transport cost hikes have made longer deliveries economically unreasonable.

Road transport fees have been increasing since the government imposed tougher weight limits earlier this year. The transport charge has increased to 0.67 yuan per kilometer/ton, up from 0.40 yuan in earlier months, traders said.

But even though the constrained transport has caused trouble on the supply side, the market has hardly felt the pinch of the supply shortfall. Coke demand is losing its momentum partly as a result of the government’s move to rein in production expansion in the steel sector.

About 70 to 80 percent of small steel mills, with production of less than 200,000 tons, have been forced to halt operations in north China’s Hebei Province and in Shandong Province in the east.

“Demand from small steel plants is falling, while big companies have their own coke production and stocks. So the impact of the supply problem has not been reflected in the market,” said the China Coal & Coke manager.

The benchmark coke price dropped to less than 1,000 yuan (US$120) per ton in June from 1,150 yuan (US$139) earlier in the year because of sluggish consumption in the steel industry. But the price picked up late last month to about 1,050 yuan (US$127) per ton.

Still, insiders are worried that prices will head further south unless the current rampant production expansion is brought under control.

Many coke producers are building new facilities or increasing the capacity of existing coke ovens. At the moment, 183 coke ovens are being built. They will have a combined production capacity of 68 million tons, according to the China North Coke and Chemical Association, an influential industry association.

The capacity of the plants under construction is equal to nearly 40 percent of the current production in China.

To curb the expansion, the government has launched a campaign to inspect new coke projects, suspending those failing to meet the stricter environmental and investment standards. All the small beehive ovens, which are inefficient and cause pollution, are supposed to be shut down.

Beehive ovens now account for a quarter of China’s total coke production.

An official with the China Coke Industry Association said local governments are to submit to the National Development and Reform Commission proposals on how to deal with projects under construction by the end of July.

The official, surnamed Xu, said he had no idea how many of those projects should be torn down.

But according to the manager from China Coal & Coke, about 20 percent of them should be suspended.

Both the manager and the official have doubts about the effectiveness of the crackdown. It’s the same old story: local protectionism.

“Local governments have no idea how much beehive ovens pollute the environment and waste coal resources,” said the official. “They care more about local employment and revenues. . . . You never know the exact numbers of the projects, especially the beehive ovens. It is very easy to dig a hole in the ground to produce beehive coke.”

The official said about half of the ovens in Shanxi Province, which accounts for the lion’s share of the nation’s coke production, fail to meet the new standards.

Although Shanxi Province has pledged to move to check overproduction, many other places such as the Inner Mongolia and Guangxi Zhuang autonomous regions and Guizhou Province are just now catching up.

In the first half of this year, production in Guizhou and Guangxi increased by more than 60 percent year on year.

(China Daily August 2, 2004)