Gov't-enforced mine closures lead to unintended consequences
China's coal industry has long been plagued by overcapacity, but it has felt the pinch more over the past two years as economic growth has slowed and demand has cooled. To deal with this problem, the government has called for enormous capacity cuts across the industry to bring supply in line with demand. And yet the government's efforts to shrink its coal industry have had an impact outside the targeted industry. On Friday, the State economic planner held a meeting to address shortages and soaring prices that have taken a major toll on the country's steel industry, which requires coking coal as a raw material. Coking coal prices from one major producing region have more than doubled this year, leaving authorities in a bind over how to maintain their capacity cuts without putting stress on other hard-hit industries.
The unintended consequences of China's efforts to shrink its coal industry emerged this week as Beijing called another last-minute industry meeting after government-enforced mine closures choked off coking coal supplies to troubled steel mills.
Shortages and soaring prices were top of the agenda at a hastily called gathering on Friday, the second in as many weeks that the State planner has scheduled with executives from the country's major coal producing regions.
In the end, the State economic planner, the National Development and Reform Commission (NDRC), rejected pleas by the steel industry for mines to ramp up output of coking coal, a key steelmaking raw material, two sources familiar with the outcome said following the meeting.
But, it did give a green light for 74 major miners to increase thermal coal output, partially reversing capacity cuts that have sent prices soaring and depleted domestic stockpiles this year.
It was not clear why the government agreed to help replenish supplies for the utilities and not the steel mills.
Even so, traders in Asia viewed the meeting as a sign of panic as the Chinese government tries to shift the world's largest energy market toward cleaner, renewable fuel sources, while ensuring utilities and steel mills have enough of their raw materials.
How the authorities deal with this headache could be seen as a blueprint for its massive steel and aluminum industries where closures of old, outdated plants have also boosted metal prices.
The mine closure issue has roiled coking coal contract talks, with little sign that a recent price rally is running out of steam.
Traders said that negotiations for fourth-quarter contracts for seaborne coking coal are at stalemate as steel mills balk at producer offers that are more than double third-quarter prices.
While producers want $200 per ton, mills are resisting even $150 to 160 per ton, a difficult jump from the third-quarter price of $92.50 per ton, a trader said.
China's biggest supplier Shanxi Coking Coal Group Co has already raised its price three times since last month, said Zhang Min, a coal analyst with Sublime China Information Group.
Coking coal prices from the major producing Shanxi Province have more than doubled to 900 yuan ($135) this year, according to Zhang.
"There are plenty of uncertainties in how the government administrative measures will work, whether the meetings will generate real output growth," said Beijing-based Mercuria, a company trades energy and commodities globally.
"Before the market sees any substantial output increase before the winter, prices will continue heading north."
The jump in coal prices underscores a supply-demand mismatch in the coal industry that has yet to seen a substantial change, according to the China National Coal Association.
"There are still many uncertainties in the coal market, and we should not be blindly optimistic," said Wang Xianzheng, the industry association's head.
Wang's cautious tone came as coal prices have risen in recent months amid a government campaign to cut ineffective production. The price increase has seen some local governments and companies wavering in their efforts to cut capacity.
The Bohai-Rim Steam-Coal Price Index, a benchmark index, this week stood at a price up 49.3 percent since the beginning of the year.
At a press conference held on Friday, an NDRC official attributed the price rise to increasing coal consumption, a crackdown on illegal production, as well as transport and logistics problems.
But with coal demand set to retreat amid government efforts to consume cleaner energy, the struggles in the industry will continue, Wang said.
By the end of July, China's major coal producers had 3.66 trillion yuan in debt, up 4.7 percent year-on-year.
To reassure the market, the NDRC said that China has plenty of policy tools to stabilize rapidly rising coal prices. If prices continue to rise, the government will take steps to increase supply, while ensuring capacity-cutting efforts are not weakened.
China, as the world's largest consumer of coal, its coal industry has long been plagued by overcapacity and has felt the pinch more over the past two years as economic growth has slowed and demand has cooled.
China's coal output fell 10.2 percent year-on-year to 2.18 billion tons during the first eight months of 2016. But official data also shows that as of the end of July, China had only achieved 38 percent of its coal cutting targets.
China plans to cut coal capacity by half a billion tons over the next few years, with vast funds set aside to help displaced workers.
This year, government authorities aim to cut coal capacity by 250 million tons.