Yanzhou Coal Mining, the mainland's second-largest listed coal miner, said its parent company Yankuang Group has received approval from the government to develop a 5-million-ton coal-to-oil project.

The first phase of the project in Northwest China's Shaanxi Province is estimated to cost 10 billion yuan (US$1.25 billion). Its capacity will reach 1 million tons of oil products a year, Chief Financial Officer Wu Yuxiang told reporters in Hong Kong yesterday.

"Total production capacity of the project will amount to 5 million tons annually," he said, without giving a timetable.

Yankung Group will mainly participate in the preliminary stage of the project, which "will be handed over to Yanzhou Coal when the time is ripe," said Wu.

"Given the abundant reserves of coal and inadequacy of oil and natural gas on the mainland, the conversion of coal to oil products will be a trend in the future," said Wu.

Other mainland coal mines are also becoming active in transforming coal into oil products to cope with rising oil demand.

Shenhua Group, the largest coal company on the mainland, is a pioneer of coal-to-oil technology and has poured 300 million (US$37 million) into the research and development of its liquefaction technology since 1997. It will start production of its first coal-to-liquid project at the end of next year.

Yanzhou Coal said yesterday it planned to produce 6 per cent more commercial coal this year.

It had produced 13 per cent less, or 31.94 million tons of commercial coal - suitable for sale - in 2005, partly because of delays in relocating people in six villages living above its mines.

"That dragged down our output by 34.6 million tons," said Wu.

But "the impact from the disruptions has been eliminated entirely in April," Wu Yuxiang told reporters. "From now on, all of our coal mines will run at full rates to meet demand.

Yanzhou, which has been acquiring assets at home and abroad, would continue to do so, Wu said.

 The company expects to sign an agreement in the second quarter of this year to buy a coal mine in Shaanxi Province. The project, designed to produce 8 million tons of coal a year, would start production by the end of this year, Wu said.

Capacity would be raised to 20 million tons annually over the next three to five years, he added.

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