By DAVID WINNING

China's domestic coal production is poised to lose competitiveness against imports by 2015, a shift that may prompt its state companies to buy overseas coal assets and ship in vast amounts more foreign coal, a report showed Monday.

UK-based consultancy Wood Mackenzie said it will be cheaper for the six provinces and municipalities that together account for much of China's manufacturing to source 90% of their coal from overseas by 2015 due to the appreciation of China's currency against the dollar and rising domestic production costs.

"By 2015, our modeled scenario shows that 857 million [metric] tons of coal could be imported into China below the 90th percentile of domestic Chinese coastal supply costs," Woodmac said.

Woodmac estimated that last year, 517 million tons of thermal coal were railed from mines in central China to ports and then sent by sea to the six coastal provinces and municipalities, namely Jiangsu, Zhejiang, Guangdong, Fujian, Hainan and Shanghai.

This domestic traffic - equivalent to 71% of the global trade in thermal coal by sea - compares with coal imports of 160 million tons in the first 11 months of 2011, General Administration of Customs data showed.

At present, costs are evenly spread whether China is importing or exporting coal.

This is why China is the main swing consumer in the global coal market, and explains its influence on regional pricing, including GlobalCoal's NEWC Index, a gauge for spot coal prices at the Australian port of Newcastle.

However, production costs in China are rising more rapidly than elsewhere. Labor costs in China's coal-mining sector rose 13% last year, compared with an 8% increase in Australia, Woodmac said.

Mining costs are increasing further due to China's drive to fold small township mines into large-scale developments.

While this consolidation can deliver economies of scale, it's also technically challenging to achieve and state-owned enterprises add layers of operating costs by implementing new safety systems and paying higher wages.

The competitiveness of China's domestic coal production is also being eroded by the appreciation of China's currency. Against the yuan, the US dollar traded at 6.31 Friday, but Woodmac assumes it will fall to 5.2 by 2015.

"With the competitiveness of imported coal increasing into southern China, and greater purchasing power of the Chinese currency, we expect Chinese coal companies will increase investment into foreign coal sectors," Woodmac said.

Yanzhou Coal Mining Co. has been most active overseas so far, acquiring Australia's Felix Resources Ltd. in 2009 for A$3.5 billion.

On Dec. 23, the Hong Kong-listed company offered to merge most of its Australian assets with those of Gloucester Coal Ltd.

"Not only would Chinese coal producers benefit from imported coal sources, we could also see the emergence of vertical integration by Chinese power utilities into the foreign coal sector in a bid to secure low-cost fuel," Woodmac said.