The Chinese company in a bidding war with Glencore for Rio Tinto’s Australian thermal coal assets is looking to Australia to solve what its chairman recently called a “looming crisis” of declining coal reserves at home.
ASX-listed Yancoal Australia, which has offered $3.24 billion for the Rio coal assets, is 78 per cent-owned by Yanzhou Coal Mining Company.
Yanzhou — which is listed on the New York, Hong Kong and Shanghai stock exchanges — is 56.59 per cent-owned by Yankuang Group, which is in turn 70 per cent-owned by the province of Shandong in China’s east, north of Shanghai.
Moody’s views the strong backing by Shandong province as important in underwriting the company’s prospects, with “any material reduction in the Yankuang Group’s ownership in Yanzhou Coal negative to the ratings”.
Yanzhou, China’s fourth-largest coalminer — and Australia’s fourth-largest too, before the Rio acquisitions are finalised — owns 20 coalmines in Shandong and Shanxi provinces and in Inner Mongolia in China, and in Queensland, NSW and Western Australia.
Li Xiyong is the chairman of Yancoal, Yanzhou and Yankuang, as well as the communist party secretary of the companies — a routine doubling-up of roles in state-owned enterprises.
Mr Li, 53, is a graduate of Shandong University in applied engineering and of the elite Nankai University in Tianjin, with an MBA. He shifted to Yankuang from the Xinwen Mining Group, also based in Shandong and which he chaired four years ago.
He told China’s Economic Observer why Yanzhou is urgently pressing to acquire overseas assets: “The coal reserves in Shandong have fallen below 4 billion tonnes, and in the coming five to 10 years, 60 per cent of the coalmines in the province face closure as a result.”
And as a Shandong-owned company, he said, “Yanzhou’s attempts to invest in other provinces has met resistance from the local governments there.”
Demand in China remains substantial, with the national government planning for 55 per cent of the country’s massive energy demand — its crucial base-load — to continue to be met by coal for decades into the future.
But domestic production is declining, with Yanzhou — which employs about 40,000 people — closing a mine last year that had been producing 1 million tonnes a year.
Mr Li told China Daily last year that “the general trend of downsizing capacity, especially outdated capacity (in China), is not going to change.”
He said: “Our goal is to turn the company into a first-rate high-efficiency clean energy supplier. Clean technologies will help the industry achieve sustainable development.”
Yanzhou focuses its production on low-sulphur coal, substantially mined underground within China, and also operates railway systems for coal transportation. Its website points out that it is based in the same area of Shandong as Qufu, the hometown of Confucius.
It sells thermal coal to power utilities in Japan and South Korea, as well as in China.
When Yancoal announced in January its bid for Rio’s Australian coal assets, Yanzhou’s shares in Hong Kong rose 3.2 per cent. Coal prices had risen substantially as China had cut its own output, with the quality of coal dipping as reserves diminish and production costs rising as miners need to dig deeper underground.
Yankuang, the parent company, owns a range of non-coal businesses as well, including in aluminium production and machinery manufacturing. It is also a major player in coal-to-liquid research. It recorded a $240m profit in 2015.
Its core finance partners in its internationalisation thrust are the Industrial and Commercial Bank of China, and Citic Securities.
In February, it signed an arrangement with Delisi Group, a meat processor also based in Shandong and which is an investor in NSW based beef processor Bindaree — to build together a cross-border online commerce platform named Austar, to market Australian beef and other rural products in China.
But coal remains Yankuang’s core focus. Its logo is red and black, representing a burning coal — which, its website says, “implies the company’s total commitment to the country’s prosperity and the group’s bright future”.
By ROWAN CALLICK