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China won’t meet coal supply cut goals

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World Coal,

The Chinese coal sector is currently plagued by significant oversupply as a dip in economic growth and concerns over pollution levels in major cities have hit the country’s demand for the fuel. Yet the government’s attempts to encourage supply cuts and industry consolidation will face significant challenges, according to a new report from BMI Research.

The Beijing government has long advocated consolidation in the coal sector and has recently stepped up its efforts in this area with a number of announcement and policies to facilitate implementation. Yet a number of factors stand in the way of industry reform.

The Chinese coal industry is essentially decentralised with ownership of mines devolved to provincial and local level, where they provide key sources of regional employment. This remains the case, despite central governments attempts to force industry consolidation: according to official statistics, there remains over 2000 companies and 11 000 coal mines in operation in the country with 53% of registered mines having an annual capacity of less than 90 000 t.

A significant pipeline of new capacity is also scheduled to come online in China over the next few years, exacerbating the oversupply challenge. Estimates from Fitch Ratings suggest that there is currently around 1.4 billion t of idle capacity currently in the system with another 1.9 billion t of new capacity to be added by 2017. While not all of this may come online, “less than half of this idle and new capacity would be sufficiently sizeable to leave the coal industry in multi-year overcapacity”.

That oversupply would persist even if government blocked all imports of coal and hit its target for cutting capacity by 0.5 – 1 billion t in three to five years.

The risk of labour unrest will also make reform difficult. In another recent report, BMI Research noted that “government’s drive to slash overcapacity has resulted in an increase in labour unrest.” Last year, worker protests doubled to 2774 with Decembers total of more than 400 such incidents setting a new monthly record, according to the Hong Kong-based China Labour Bulletin.

Finally, announced reforms targeting consolidation and capacity cuts will play second fiddle to government’s support for state-owned enterprises in China’s new five year plant. This includes plans to provide oversupplied sectors with fiscal, tax, financial and land policy support in order to rescue and upgrade their businesses.

“Consolidating the sector and cutting capacity will prove difficult,” concludes BMI Research. “As such, coal overcapacity is likely to be a prolonged issue and local coal companies' earnings will remain under pressure.”

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