Xinhua Insight: China's coal industry reforms to survive

China's coal giants have been seeking ways to rid themselves of incessant price falls and aggressively stockpiling since April, although experts believe the industry's "golden years" are already gone.

With 13 weeks of continuous price drops, coal prices reached 626 yuan per tonne in August, down 20.5 percent from that of early May, while storage climbed to a historical high of more than 18 million tonnes at China's major coal ports, according to statistics from osc.org.cn and cqcoal.com.

Coal prices will remain low in the long term and the structure of China's power supply is expected change, as the coal industry will enter an adjustment period featuring high costs and low profits, according to an analysis from the Shandong Provincial Coal Transporting and Maketing Association.

Experts believe high profits and rapid development are over for the coal industry, heralding the start of a new round of reforms.

Many small- and mid-sized coal mines have been suspended or closed, while bigger companies have started to reduce output to control the deficit in leading coal-producing provinces, including Shanxi, Shaanxi, Guizhou and Shandong. Another 625 small mines will be closed by the end of this year, said Yang Dongliang, diretor of the State Administration of Work Safety.

The problems facing China's coal industry revealed when the profits of coal entrepreneurs and transporters started to shrink, said Guan Dali, analyst at chem365.net.

Severe overcapacity in many coal-producing provinces has led to overstorage amid sharp decreases in power-generating capacity among thermal power comapnies, analysts said. Considered to be most famous coal-producing province, north China's Shanxi Province produced 860 million tonnes in 2011, compared with the government-set target of 780 to 800 million tonnes.

A lack of monitoring regarding domestic and overseas demand and supply has also been blamed. Increasing import volumes have impacted the domestic market, as the international coal price is 100 yuan lower than China's price.

Rising costs during middle trades have had an effect as well. Production costs end up accounting for just half of the final price, while the other half is created during circulation, said Wang Hongying, dean of the Macroeconomic Research Institute under the Shanxi Provincial Development and Reform Commision.

Coal merchants are working with power companies to find a way out. The combination of the two industries, referred to as the "coal-power pool project," is expected to save both sectors, said Ji Mingde, deputy of the Shanxi Economy and Information Committee

The Xishan Coal and Electricity Group (XCEG), the largest coking coal production base in Shanxi, has purchased shares of another two electricity companies, the Wuxiang Hexin and Xingneng power companies.

Li Shian, vice manager of a power plant owned by Wuxiang Hexin said the purchase has benefited the plant.

"The coal company and power plant can jointly withstand crises concerning supply and demand or technogical issues," said Li.

Analyst say these purchases will expand Xishan's ability to generate power at a lower cost.

XCEG is not an isolated case, as more coal companies are working to develop their downstream business.

The Shanxi provincial government issued an official statement on July 13 encouraging the joint operation of coal mining and power enterprises.

The statement calls for the incorporation of the two sectors through capital investment and share exchanges, as well as encourages reciprocal holdings and restructuring.

But such measures have been tried before with limited degrees of success.

In March 1989, the nation's energy authority introduced a scheme that encouraged coal firm and power plants to collaborate in several ways in in order to solve discrepancies between the coal and power pricing systems, Ji said.

Coal prices are sensitive to the market in China, while power prices are decided by the state, creating discrepancies between the two.

Rising coal prices in the past decade have been a headache for China's power companies, which have incurred sharp losses due to the rises.

The country's top five state-owned power generating gcompanies -- China Huaneng Group, China Datang Corp., China Huadian Corp., China Guodian Corp. and China Power Investment Corp. -- have all accelerated their development of coal mine projects since 2002.

Coal production by the five companies totaled 226 million tonnes as of the end of 2011, according to statistics published by the five companies.

"It represents the dilemma of steadying the price of electricity against the market-driven coal price," said Sha Yiqiang, an analyst from the China Electricity Council.

Pan Yun, deputy of the Shanxi provincial Academy of Social Science, said the joint operation will aid both sides by easing the stockpiling burden among coal enterprises amid falling coal prices while shouldering the fluctuation of coal prices for power plants.

However, cooperation between the two sectors has not been without its critics.

"Survival is not enough. We need further development," said Li Shian.

Li said the strategy could even lead to new monopolies among coal and power companies.

The government's role has also triggered concerns about whether the influence of the market will be diminished.

"Coal and power are two independent industries that should be decided by the market," said Li.

Nevertheless, Ji stressed that the strategy is aimed at creating a long-term win-win situation for both sides.

"The government will fully respect the two differentiated marketplaces. By setting up a service platform to help them seek cooperative opportunities, the government will act more like a cheerleader than a conductor," Ji said.

Fan Bi, deputy of the general department of the State Council research office, said the government should establish a free market for both coal and power to allow their prices to be wholly determined through market mechanics.