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China Coal Slump May Spark Reforms – Analysis

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By Michael Lelyveld

China’s slowing economy and growing backlogs of coal are prompting calls for permanent reforms in mining the country’s main fuel.

Mounting stockpiles at ports and power plants for the past several months have forced cutbacks in the country that consumed 3.7 billion metric tons of high-polluting coal last year.

The huge volume was nearly half of all the coal burned in the world, the official English-language China Daily said.

People's Republic of China
People’s Republic of China

Coal is normally a booming business in China. But the country’s slowdown to 7.6-percent growth in gross domestic product (GDP) in the second quarter has been followed by sluggish power production, up just 2.1 percent from a year earlier in July, the National Bureau of Statistics (NBS) said.

Coal prices have dropped by over 20 percent since May, while storage hit historic highs at China’s major ports, the official Xinhua news agency said.

Last week, the National Development and Reform Commission (NDRC) lowered this year’s output target to 3.65 billion tons, a 3.7-percent increase from 2011 but an 8.7-percent drop from last year’s production pace, according to state media.

Production cut

The major coal provinces of Inner Mongolia, Shanxi and Shaanxi were told to lower their combined targets by at least 230 million tons.

Although the NBS rarely reports coal data, China has already cut production capacity by more than Australia’s total coal output, the Sydney Morning Herald reported, citing Bloomberg News.

Australia produced 435 million short tons of coal last year, equal to more than 11 percent of China’s output, according to U.S. Department of Energy figures.

A cutback of that size would be the biggest in a decade, although some official statements suggest more modest goals.

Signs of change

On July 31, the State Administration of Work Safety (SAWS) said authorities would seal off 625 small mines to accelerate an ongoing campaign against accidents.

“We should use the opportunity afforded by excess coal supplies to intensify our crackdown on small coal mines and eliminate outdated mines,” SAWS director Yang Dongliang said.

Shutdowns are planned in Hunan, Yunnan, Guizhou, and Sichuan provinces. But in a separate Xinhua report, the National Energy Administration (NEA) said the closings would reduce capacity by only about 23.5 million tons per year.

Still, the reports have raised expectations of more significant change.

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

“Coal prices will remain low in the long term and the structure of China’s power supply is expected to change, as the coal industry will enter an adjustment period featuring high costs and low profits,” the Shandong Provincial Coal Transporting and Marketing Association was quoted as saying.

Ambiguity

But whether the conditions will lead to major reforms is still an unsettled question, said Kevin Jianjun Tu, senior associate in the energy and climate program at the Carnegie Endowment for International Peace in Washington.

“Currently, it’s very difficult to know what will happen,” Tu said by phone from Beijing. “Everything needs to wait until the political transition later this year. That’s the political reality in China.”

“My perception is that sooner or later, the Chinese government needs to do something to reform its energy oversight mechanism because currently the system doesn’t work very well,” he said.

Some of the blame for the coal slump has been placed on “lack of monitoring regarding domestic and overseas demand,” a failure that has caught up with China after years of high growth.

While the economy decelerated and electricity demand flattened, China’s coal mines produced 1.91 billion metric tons in the first half, up 5.6 percent from a year earlier, Platts news service said.

Stockpiles surged and prices slid, but Tu said the overestimate of demand may not have been the producers’ fault.

“The Chinese energy and economic stats are full of question marks. Everyone wonders what’s going on,” he said. “I am not entirely sure whether the official stats can be fully equivalent to what’s going on in China.”

Power pricing

July electricity figures may be a case in point.

On Aug. 14, the NEA reported power consumption rose 4.5 percent, more than twice as fast as the production figures from the NBS five days before. The difference could be explained by a surge in electricity imports or just bad data. The answer is unclear.

Several experts cited by Xinhua called for closer ties between generating companies and coal producers to “solve discrepancies” between coal and power pricing. But that solution has already been tried.

Thanks to mining investments, the five big state-owned power companies already accounted for 226 million tons of coal production last year, Xinhua said.

The companies still lost 15.4 billion yuan ($2.4 billion) on coal-fired generation in the first half of this year, Bloomberg reported.

Much of the problem can be traced to China’s hybrid system which supplies some coal under annual contracts at agreed prices and the rest at floating market rates, while power prices remain fixed by the state.

This year, the unstable market has led some power companies to default on annual contracts in favor of cheaper coal imports, the website www.coalguru.com said last week.

Given the long list of problems, the task of reform is likely to require changes not only for coal but also for power, pricing policy, and data reporting.

No bold steps

While coal mines and workers may struggle with the stockpile crisis, major changes to the system seem unlikely, said Philip Andrews-Speed, a China energy expert and associate fellow of the London-based Chatham House policy institute.

“With government change coming about, I don’t think anybody is going to be taking bold steps with power pricing and the links between the coal sector and power sector,” he said.

Andrews-Speed said the surplus is the result of investments made in larger mines five years ago.

“These mines have come on stream just as the economy is slowing down. Combined with the fact that the rail capacity hasn’t kept pace, it means there are huge stockpiles building up near the mines and at power stations,” he said.

Transport problems mean that coastal power stations have still been importing coal because they can’t get enough supplies from the north, despite the glut, said Andrews-Speed.

While the problems have grown, none of them are new or likely to command immediate attention from the incoming government, especially considering the complexity of needed reforms.

“This is just an investment cycle and the Chinese government can just wait, slow down this year’s and next year’s coal production targets,” Andrews-Speed said.

To the extent that the new leaders focus on energy, they are expected to concentrate on the most pressing issues.

“The biggest energy challenges are improving energy efficiency and reducing pollution from energy,” said Andrews- Speed. “The question is whether you need complete reform of the coal and electricity industry to keep those challenges moving in the right direction.”

“In the short term, the answer is probably no,” he said.

RFA

Radio Free Asia’s mission is to provide accurate and timely news and information to Asian countries whose governments prohibit access to a free press. Content used with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036.

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