Coal makes up 69 percent of China's total primary energy consumption, and China is both the largest consumer and producer of coal in the world. China holds an estimated 126.2 billion short tons of recoverable coal reserves, the third-largest in the world behind the United States and Russia. Northern China, especially Shanxi Province, contains most of China's easily accessible coal and virtually all of the large state-owned mines. Coal from southern mines tends to be higher in sulfur and ash, and therefore unsuitable for many applications. In 2004, China consumed 2.1 billion short tons of coal, representing more than one third of the world total and a 46 percent increase since 2002. Coal consumption has been on the rise in China over the last five years, reversing the decline seen from 1997 to 2000.

China’s coal industry has traditionally been spread out among large state-owned coal mines, local state-owned coal mines, and thousands of town and village coal mines. In February 2006, the NDRC revealed a plan to restructure China’s coal sector and reduce the fragmentation in the industry, with the goal of establishing five to six giant conglomerates in China’s main coal-producing provinces and closing down all small coal mines by 2015. Under the NDRC’s directives, the Chinese government would look to aggregate the coal industry into large state-owned holding companies and seek to raise capital through international stock offerings, much like the creation of CNPC and Sinopec. The model for this vision is the state-owned Shenhua Group, which is China’s largest coal company by production and the parent company of Hong Kong-listed Shenhua Energy Corporation.

A number of factors are driving this trend. China has tens of thousands of small local coal mines where inefficient management, insufficient investment, outdated equipment, and poor safety records prevent the full utilization of coal resources. The goal of consolidating the industry is to raise total coal output, attract greater investment and new coal technologies, and improve the safety and environmental record of coal mines. According to one industry report, at the end of 2005 China had 28,000 coal mines, of which 2,000 were state-owned. Independent analysts estimate that over the past several years China has closed down between 20,000 and 50,000 small coal mines.

In contrast to the past, China is becoming increasingly open to foreign investment in the coal sector, particularly in an effort to modernize existing large-scale mines and introduce new technologies into China’s coal industry. The China National Coal Import and Export Corporation is the primary Chinese partner for foreign investors in the coal sector. Areas of interest in foreign investment concentrate on new technologies with efficiency and environmental benefits, including coal liquefaction, coal bed methane production, and slurry pipeline transportation projects. The Chinese government is actively promoting the development of a large coal-to-liquids industry. A Shenhua Group subsidiary is scheduled to complete construction of the country’s first coal-to-liquids plant in mid-2007. The facility will be located in the Inner Mongolia Autonomous Region and have an initial capacity of approximately 60,000 bbl/d of diesel.