The Chinese coal industry responds to weakening demand and a flood of imported coal

by Lifeng Fang

May 24, 2013

A girl and her mother wear respirator masks and hold a banner reading No PM2.5. Beijing experienced 2,589 deaths and a loss of US$328 million in 2012 because of PM2.5 pollution. Cities in Chinas Yangtze River Delta, Pearl River Delta, and Beijing-Tianjin-Hebei region suffered over 100 hazy days a year with PM2.5 concentration two to four times above World Health Organization guidelines. Particles less than 2.5 micrometers in diameter, PM2.5, are called "fine" particles and can lodge deeply into the lungs.

© Greenpeace / Wu Di

A girl and her mother in Beijing, China

A girl and her mother in Beijing, China

The Chinese coal mining industry has been hit by slowing coal consumption growth and simultaneously, a flood of cheaper imported coal. To stem the decline in profits, Chinese coal producers are pursuing a variety of strategies, including considering investing in renewable energy, auctioning Australian coal export capacity, and pushing new coal import standards.

Following the record 289 million tons of coal imported in 2012, China imported 110 million tons of coal in the first four months of 2013, a 25.6 percent rise compared to the same period of 2012. Cheaper imported coal has hit domestic coal prices, and this month, Chinas benchmark thermal coal price fell to 611 yuan per ton ($98.69), a three year low.

The sluggish economy has dampened demand for coal; Chinas thermal power generation growth rate slowed to 0.6 percent in 2012 according to figures from the National Bureau of Statistics. Weak demand can also be seen in downstream industry sectors as the iron, steel and cement output growth rates are down.

With coal demand and prices falling, Chinas coal industry has been losing money. According to the statistics from China Coal Economic Research Institute, 39 listed coal company experienced total net profits decline to five year lows.

Chinas coal output in the first quarter of 2013 dropped 1 percent year-on-year to 830 million tons, while the consumption growth rate slowed to 1.5 percent, according to data from the China Coal Industry Association reported in China coal news.

One of the ways the Chinese coal industry is responding to this weakening growth and cheap imports is quite interesting. The largest coal mining company in China, Shenhua Energy, is considering a joint investment project with Hydro Tasmania to build wind farms in Australia, supporting the Australian governments program to generate 20 percent of its power from renewable energy by 2020.

The Chinese coal industrys response also shows the potential for impacts to coal producers in the countries exporting to China. Yancoal Australia, majority owned by Chinas Yanzhou Coal, is among the companies in Australia putting excess port capacity on the block, signaling a lack of confidence that coal prices will rebound soon the Wall Street Journal reports. Glencore Xstrata, an Australian coal producer, is also seeking to auction part of its stake in a coal export terminal set to open in 2015; that follows the companys recent announcement that it would cancel another planned export terminal.

Another measure that may be designed in part to protect Chinese coal producers are proposed import standards that would ban low quality imported coal. That has Indonesian coal producers worried about catastrophic reductions in prices – a reminder of the risks of resource extraction based economies in a global market.

Meanwhile, assessments from Deutsche Bank and Goldmans Sachs of reduced Chinese demand and the flooded global coal market mean that Chinas hunger for American coal are in doubt, McClatchy reports. When questioned about those reports and the implications for US coal exports, a spokesman for the National Mining Association, a lobby group for US coal companies like Arch and Peabody, tried to put on a positive spin; “With any product, but energy in particular, you’ll see some peaks and valleys.”

Perhaps its time for US coal companies look at Shenhua Energy, and consider investing in renewable energy.

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