China’s robust economic growth has created a voracious thirst for energy, . Tian Wenwei, the vice-president of Puda Coal (OTCBB: PUDC) talks to Amy Cheung of The China Perspective about China’s energy needs, the company’s plans to expand from the coal washing industry into mining, and the role of clean coal in addressing China’s environmental problems.

The China Perspective: Have Puda Coal’s growth drivers changed this year from last? What are the performance forecasts for 2007 and 2008?
Tian Wenwei: There have been no changes to our growth drivers. Demand for high grade cleaned coal is still strong, as is demand from the iron and steel sector. In 2007, we expect our sales revenues to climb 60% year-on-year to between US$210 and US$220 million, and we expect a full year 2007 operating income of between US$34 million and US$36 million.

As for 2008, we do not have a formal forecast yet as our financial performance will depend on whether our expansion plans can be completed on schedule in 2007. We plan to expand our coal washing facilities this year. Also, we plan to enter the coal mining industry by acquiring a coal mine. By securing a steady local coal supply, we will boost our profit margin and ensure stable cash flow. We have maintained a gross profit margin above 20% over the last 3 years, which is consistently higher than the industry average of 17.0%.

TCP: How much demand is there in China for high grade cleaned coal?
TWW: Demand for washed coal is driven mainly by demand for steel, as the primary customers for cleaned coal are coking companies and steel manufacturers. In the near term, several huge infrastructure projects, including the Olympic Games in Beijing in 2008, the Shanghai World Expo in 2010 and the Three Gorges Dam will drive demand for high grade metallurgical coking coal. Strong steel and construction demand arising from the strong real estate and infrastructure sectors was largely behind our  growth in the first-quarter of 2007.

Driven by China’s western development plan, which is a key component of the current 11th Five-year Plan, demand for steel and coking coal products is expected to grow at a rapid pace over the next few decades. In 2006, the government announced a new countryside plan to build infrastructure in central and western China. This is why we are optimistic about post-Olympic demand for our products and we believe the economy will continue its upward trajectory.

TCP: Do you think the government promotion of clean energy and pollution reduction will increase the demand for and popularity of PUDC’s products?
TWW: We certainly think the government’s objectives can increase the demand for and popularity of our products. Coal washing can effectively reduce pollution in the air, and the coal utilization rate can also be increased. These are what characterize our products, and is what the government is actively promoting.

TCP: What can the government do to further promote green energy and clean coal? In what ways will PUDC benefit?
TWW: Although the central and provincial government encourage the development of certain industries, including coal washing, there are not that many incentives offered. PUDC’s most important drivers comes from the economic rather than policy environment. However, government policy does make it easier for us to obtain land and government approval for any new project or facility development.

I personally don’t believe that more incentives will mean more rapid development for the industry. The coal washing industry’s current rapid growth is a sufficient driver for the industry. We believe the industry will maintain its current 15-20% growth rate until 2010.

TCP: PUDC mainly supplies premium grade coking coal to the steel making industry for use in making coke. Do you have any plans to expand the client base to cover other industries or products?
TWW: As I mentioned before, we plan to acquire a coal mine to move into the upstream coal mining industry. At present, we do not have any concrete plans to expand into other industries since we want to focus on the industries we are engaged in first.

TCP: PUDC has primary markets in Shanxi, Hebei, Inner Mongolia, Tianjin and Beijing. What is its share of the mainland market overall, and how does PUDC plan to expand this share and open up other provinces?
TWW: The coal washing industry in these markets is highly fragmented, and is comprised of a combination of state-owned enterprises and non-state owned public and private companies. Annual demand for high grade coking coal is 100 million metric tons, and our company can supply around 2 million tons. However, we believe PUDC is the largest coking coal cleaning company in terms of capacity in Shanxi Province.

We plan to expand to central and eastern provinces such as Hubei and Anhui. The main obstacle to this plan is transportation issues because China still suffers from very limited transport capacity. We so far have not concluded any contracts with any customers located in these provinces but we are in the process of actively acquiring customers.

TCP: The government has announced a series of measures to curb of resource exports. Is PUDC affected by these measures?
TWW: These measures do not affect PUDC at all since we are not engaged in the import and export business. We also do not plan to expand into overseas markets either since the Chinese market has high potential and offers much room for development. As a result, we want to focus on cultivating the domestic market first.

TCP: How does PUDC address health and safety issues?
TWW: These are not significant issues in the coal washing industry. As for coal mining, although China’s security standards are generally not that high, there have been no accidents among our suppliers and related coal mines for a long time. When we expand into the coal mining industry, I’m confident that we can maintain security on a high level. First, we have experienced managers to manage the security. Second, we are committed to paying great attention to these issues and investing in security measures. This will make a great difference to our future coal mine’s security and health levels.