July 9 (Bloomberg) -- Hidili Industry International Development Co., southwestern China's largest producer of coking coal, said purchases by steelmakers for rebuilding after the May earthquake will keep prices at a record through 2009.

Hidili shares rose as much as 5.3 percent after Board Secretary Xu Hui said profit will double this year as mine closures in China limit supplies. The company is based in Panzhihua, Sichuan province, where the quake killed more than 69,000 and rebuilding will cost $73 billion.

A doubling in China's coking coal prices this year has failed to deter expansion by steelmakers, which are forecast to increase output by 10 percent in 2008. Hidili has climbed 88 percent since trading started in Hong Kong in September.

``Coal producers' profit will rise this and next year,'' said Zhang Feng, a Hong Kong-based analyst at JPMorgan Chase & Co. ``Steelmakers so far can pass on the higher costs, but their profit margins will be eroded.''

Hidili gained 3.2 percent to close at HK$12.80 in Hong Kong today.

Steelmakers Want More

``Demand from steelmakers is very strong,'' said Xu in a phone interview. Xu declined to give specific profit or price forecasts. Hidili posted a 2007 profit of 570.3 million yuan ($84 million).

China's coking coal prices jumped to 1,900 yuan a ton this year, said Hao Xiangbin, deputy director of information at China Coal Transport & Distribution Association. Demand from steelmakers may rise 6 percent this year, outpacing a supply increase, he said.

China, the world's fastest-growing major economy, may boost steel output by as much as 10 percent to 540 million metric tons this year, according to the China Iron and Steel Association. Reconstruction work in Sichuan will cost more than 500 billion yuan over the next three years, Deutsche Bank AG said in June.

Chinese coal producers have been expanding capacity for energy coal to meet demand from power plants, which has led to limited new supplies of coking coal, Xu said.

The Chinese government have also been shutting thousands of small and unsafe mines in the country, aggravating the shortfall.

High Profit Margins

International supplies of coking coal have been crimped this year because of flooding in Australian mines owned by BHP Billiton Ltd, the largest exporter of the fuel.

Hidili's profit margins will exceed 70 percent this year, and the company may maintain the margins until the end of 2009, Xu said.

``The 70 percent profit margin could make it outshine the other Hong Kong-listed Chinese coal miners, which have margins of about 50 percent,'' JPMorgan's Zhang said. `The coal shortage may get worse this winter on transportation clogs.''

Chinese train operators have cut normal services to help with relief efforts in Sichuan. Shipping energy coal to power plants in winter is also a priority to prevent blackouts.

Hidili aims to boost production capacity fivefold to 10 million tons in the next three to five years through acquisitions in southern China to benefit from the rising demand.

The company supplies coal to steelmakers in southern and western China, including Panzhihua Iron & Steel Group and Liuzhou Iron & Steel Group.

It aims to supply Baosteel Group Corp., the nation's largest mill, and Wuhan Iron & Steel Group, as they each build a 10 million-ton steel plant in the region, Xu said.

Baosteel and rivals are also paying more for iron ore, which almost doubled in prices this year because of limited supplies. Baosteel's coking coal costs may rise up to 60 percent this year from 2007, Helen Lau, a Shanghai-based analyst at Daiwa Securities Group Inc., said.

``Larger steelmakers, such as Baosteel, are able to pass on the higher costs,'' Lau said. ``Small steel and iron producers can hardly survive because of a lack of scale.''

To contact the reporter for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

Last Updated: July 9, 2008 05:41 EDT