China’s coal industry operates in a different world. One day the government says there will be a major coal surplus. Another day it warns of a serious deficit, with stocks at many thermal power plants sufficient to manage only seven days of operation. For years, the government has bragged about its efforts to close small coalmines due to inefficiency and unsafe operations. However, this year the government has been asking owners to reopen those same mines.

What went wrong? Some blame the poor forecasting of supply and demand by governmentowned thinktanks, which the government relies on to make industry policy decisions. The government has already expressed dissatisfaction with some research institutes that always take a conservative approach when forecasting energy prices and supplies.

In 2006, China’s top planning body, the National Development and Reform Commission, warned about a looming coal surplus. China then had 2,734 coal projects under development. When completed, coal production would be raised by 800 million tons, more than enough for the forecasted demand. The N.D.R.C. made a similar judgment over the thermal power sector in 2003, resulting in a ban on the construction of coalbased power plants due to concerns of supply overhang.

But just a few months ago, the central government announced that it was expecting a coal shortfall of 40 million tons this year. And that supply crunch is especially serious after the heavy snowstorms in February and the Sichuan earthquake in May. To meet the demand, the country will increase coal production capacity by 222 million tons, raising the total supply to about 2.7 billion tons.

This year, coal demand in the power generation sector rose by 1.8 percent to 1.56 billion tons, an increase of 157 million tons. The iron and steel making will need a 9 percent increase of 41 million tons, rising to 496 million tons, and the demand from the construction material sector will also rise by 9 percent, to 432 million tons. In China, coal is also used as feedstock for chemical production, with the sector’s demand set to rise by 25 million tons.

In order to replenish the dwindling coal stocks across the country, China has urged coalmines to boost production. The government wants to ensure that the coalfired power plants will have enough coal stocks for generators to operate at least 15 days.

Due in part to a lack of available coal, China has faced a serious power supply shortage this summer. During the hot season the country has a power capacity shortage of 10,000 megawatts. The southern province of Guangdong bears the brunt, with a supply shortfall of 6,000 MW. There has also been a record power shortage in Shanxi Province, where the government has had to ration electricity, hurting energyintensive plants such as aluminum smelters.

The coal shortage is also being felt in other sectors. In July, China’s top 20 aluminum smelters, including Aluminum Corp. of China, cut production by about 10 percent to reduce power consumption.

The strong demand has also suspended China’s coal export in the first two months this year. The government cut the coal export quota by 30 percent to 49 million tons, but actual export volume is figured at about 35 million tons. In January, the Ministry of Communications said that exports would not be allowed before midMarch to ensure enough supply during the Chinese Lunar New Year and this year’s People’s Congress session.

The country has also been reopening shuttered mines. According to the State Safety Supervision Administration, 2,334 coalmines had gone back into operation by early February, and another 5,300 or so were reopened before March 5, when the National People’s Congress began. Of those reopened mines, about 40 percent were closed after the electricity supply failure caused by late January’s huge snowstorms.

The May earthquake in the southwestern Sichuan Province affected operations at 199 coalmines with annual production capacity of 14.5 million tons. Sixty were flooded from heavy rain following the quake.

While the government scrounges for more coal supplies, the call to reopen small coalmines has met with resistance from local officials worried about the safety situation there. They are afraid of losing their jobs in the event of a significant accident. In June, six officials in the Lujiang region of Shanxi Province were sacked after a blast at a small mine killed 34.

Over the past four years, China has implemented a safety campaign at small coalmines, shutting down small and inefficient mines that provided nearly 40 percent of the country’s coal in 2007. China’s official goal is to cut the number of small mines to below 10,000 by 2010 and eliminate them by 2015.

In addition to safety worries, mine operators are concerned about profitability in the wake of the government’s decision to cap coal prices. Under a rule promulgated by federal authorities, the N.D.R.C. froze prices for coal based on prices that existed on June 19. But it remains to be seen how effective those price caps will be.

The surging coal price has hurt the margins of major power operators like Datang International Power. China's secondlargest listed electricity provider estimated its first half net profit fell more than 70 percent, due to a sharp rise in coal prices. According to Liu Nanchang, an official of the stateowned Assets Supervision and Administration Commission, more than 70 percent of China's stateowned power generating companies will be running in the red if coal prices continue upward. As a result, Chinese power generators are reluctant to launch new projects. The power companies have slowed the pace of capacity expansion in the first five months of the year. For instance, in May some 4,247 MW of new capacity came online, down nearly 37 percent from the year earlier.

China expects to raise power generation capacity to 950,000 MW by 2010, including 210,000 MW of hydropower, accounting for 22.3 percent 710,000 MW of thermal power 74.7 percent 9,500 MW of nuclear power 1 percent and 20,000 MW of power from renewable energy such as wind power, accounting for 2 percent.

The coal price cap has also spurred traders to increase their coal exports to make more money. In June, China’s coal exports surged 83.5 percent on year to 6.99 million tons, with an average export price of $110.40 per ton, down 16.6 percent from May's $132.40 per ton. From January to June, China exported 24.59 million tons of coal, mainly to Japan and Korea, up by 10.2 percent over the same period last year, but that is still well short of the 31.8 million tons of export quota.

Over the long run, coal will continue to be China’s largest energy supply source. China plans to raise its coal production by 6.5 percent this year to 2.7 billion tons, and to 3.1 million tons by 2010. For reference, the U.S. consumed about 1.1 billion tons of coal in 2007. China’s largest coalproducing province of Shanxi plans to raise production to 700 million tons per year by 2010, up from 540 million tons last year. The province is home to China’s largest coal reserves, 270 billion tons, accounting for 25 percent of China’s total.

Say whatever you like about China’s aspirations or environmental challenges. Coal is going to be its fuel of choice for decades to come.