South Korea Faces Chinese Competition for Asian Coal Resources

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Researched by Industrial Info Resources (Sugar Land, Texas)--South Korea is competing for Asian coal resources with China and other developing countries in the region to secure energy inputs to support the country's expanding heavy engineering and industrial sectors.

A memorandum of understanding will be signed with Mongolia in February to forward a joint venture plan for the construction of a pilot synthetic natural gas (SNG) production plant that is able to use a feed of low-grade coal. Plant support and technology will be provided by South Korea, with Mongolia making the necessary land and coal supplies available for conversion into fuel oil and a range of chemical products.

The South Korean Ministry of Knowledge Economy has said that the plan is a part of the overall work on clean-coal development, which has been receiving government and private-sector input since 2009. Under the initiative, steelmaker POSCO (NYSE:PKX) (Pohang, South Korea) will invest $899 million, and SK Innovation (SEO:096770) (Seoul, South Korea) will provide $492 million through 2013 to construct SNG plants in South Korea. A total of $1.6 billion could be invested in SNG production to produce 6 million barrels of transport fuel. The ministry said that this would be equivalent to 2.5% of domestic demand. Details of the SNG pilot project plan are still being developed.

Reports indicate that the bitter relations between South Korea and North Korea, and the need for North Korea to keep an entry to the Chinese market open are giving China the advantage in obtaining rights to North Korea's considerable reserves of minerals, including coal and iron ore. Currently, the major portion of China's $750 million per year imports from its neighbor consists of minerals. Statistics Korea (Daejeo, South Korea) reports that the North Koreans have estimated the value of its mineral reserves at $6.1 trillion, which is 24 times South Korea's estimated mineral reserves.

China, by virtue of its border with Mongolia, has an advantage in accessing coal supplies from the Tavan Tolgoi coalfield in Mongolia's Gobi Desert, which has estimated reserves of up to 6 billion tons of coal. An initial public offering of shares in the Tavan Tolgoi mine is under preparation, and this is likely to be issued through the Hong Kong or London stock exchanges. Details have not yet been finalized, but the Mongolian government currently intends to retain ownership of 50% of the reserves and distribute some of the coal production free to the Mongolian public.

The bidding process for the contract to operate the mine has been progressing for six months. The deadline for applications was extended to January 24 to allow time for new bidders to enter the competition. Toward the end of 2010, a Japanese consortium was reported to be in a good position for the contract, and if successful would supply its own domestic market and China with Tavan Tolgoi coal.

Now companies from South Korea and India, not in the original list of nine companies in September 2010, have shown interest in bidding. South Korea may be looking to its Mongolian relationships developed in the SNG project to give it some traction in the final bidding stages. The bidding consortia could also see China Shenua Energy Company Limited (HKG:1088) (Beijing, China) making a joint bid with Peabody Energy (NYSE:BTU) (St. Louis, Missouri) and the original Japanese consortium inviting South Korean and Russian companies into their bid.

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