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China Bid to Curb Coal Output Seen Lifting Prices by 10%

Photographer: Nelson Ching/Bloomberg

Cutting production at the largest mining companies in China is on track to do what government officials are hoping: boost coal prices and help shore up the struggling industry.

That’s the conclusion of ICIS-C1 Energy, a consulting company in Shanghai, which predicts coal prices may advance 10 percent in the fourth quarter because of the output reduction and government plans to ban shipments of lower-quality cargoes from overseas.

China, both the world’s largest market for coal and worst carbon-dioxide emitter, is seeking to reduce output at the nation’s 14 largest producers after prices slumped amid efforts to moderate economic growth and fight pollution. More than 70 percent of miners are unprofitable and half are delaying or cutting wage payments, according to the China Coal Industry Association.

“Coal prices have started to show a recovery since the moment the government decided to step in,” Shi Yan, a Shanghai-based analyst at UOB-Kay Hian Ltd., said by phone on Sept. 10. “The recovery may accelerate going forward.”

The rules -- which target 10 percent of output at the largest producers or the equivalent of about 63 percent of the nation’s annual imports -- will take 190 million metric tons of supply, or about 5 percent of this year’s production, off the market in 2014, according to UOB-Kay Hian, a Singapore-based brokerage.

Photographer: Tomohiro Ohsumi/Bloomberg

Government Action

“The government is worried about the current low coal price,” Deng Shun, an analyst at ICIS-C1, said by phone from Guangzhou on Aug. 20. “They’re concerned that this could cause a series of social problems such as workers’ salaries not being paid and less spending on safety measures.”

The spot price at the port of Qinhuangdao slid 52 percent from a peak six years ago to 470-480 yuan a ton in the week ended Aug. 3, the lowest level since September 2007, according to the China Coal Transport and Distribution Association, or CCTD. It has remained unchanged since then.

Qinhuangdao spot coal prices have probably bottomed and are expected to rebound to 520-530 yuan a ton in the fourth quarter, forecasts both ICIS-C1 and the CCTD.

The National Development and Reform Commission, China’s top economic policy planning body, said on Aug. 21 that it would levy penalties on those flouting production rules. Mining companies face fines of 500,000 yuan to 2 million yuan if they exceed output limits, according to a statement on its website. They may also be suspended.

The government may “soon” publish regulations banning the import of coal with high-ash and high-sulfur content, cutting purchases by 80 million tons, or about 25 percent of annual supplies from overseas, the CCTD said in a statement on Aug. 26.

Curbing Pollution

China depends on coal for about 65 percent of its energy. While trying to revive the industry, the government is also seeking to limit the nation’s dependence on coal as increased pollution raised smog levels in Shanghai and Beijing and sparked social unrest in cities such as Maoming and Hangzhou.

The Institute of Public & Environmental Affairs in Beijing estimates more than 600 million people have been affected by a “globally unprecedented” outbreak of smog that started in January 2013.

China, which the World Bank estimates has 16 of the planet’s 20 most-polluted cities, is examining a draft law that will prohibit the production, import and sale of the fuel that doesn’t meet quality standards, the State Council Legislative Affairs Office said on its website Sept. 10. It’s also seeking to cut the share of coal in the country’s energy mix in a bid to tackle pollution, according to the statement.

Slowing Economy

The Bohai-Rim coal index, a Chinese benchmark, rose 0.8 percent to 482 yuan ($79) a ton in the week through Sept. 3, snapping a 13-week losing streak, data from the website of the Qinhuangdao Seaborne Coal Market shows.

Prices fell amid increased signs the domestic economy is losing momentum. Recent data showed a plunge in the nation’s broadest measure of new credit, a slowdown in industrial production and investment growth, a slumping property market and a pullback in manufacturing.

The economy is expected to expand 7.4 percent this year, the slowest rate since 1990, according to the median estimate in a Bloomberg survey of economists.

Some companies may be reluctant to comply with the government rules because reducing output will be “generally negative for earnings and cash flow,” while lost market share may be hard to regain, according to Andrew Driscoll, an energy analyst at CLSA Ltd. in Hong Kong.

“An output cut would stop the slide in coal prices, but surplus capacity will continue to cap any sustained rally,” he said in an e-mail on Sept. 9.

Global Supply

Around the world, prices have declined amid ample supply. Power-station coal at Newcastle port inAustralia, Asia’s benchmark grade, are down 20 percent this year and trading at about $67 a ton.

Qinhuangdao terminal in China’s Bohai Bay, which ships the most seaborne coal globally, may handle record deliveries over the next three years, Xing Luzhen, the chairman of Qinhuangdao Port Co., said in the northern Chinese city on Aug. 14.

The global glut in coal is projected to reach 17 million tons this year amid an increase in sales fromIndonesia, UBS AG estimated in an Aug. 13 report. Shipments from the biggest exporter of thermal coal are forecast to climb by 12 percent to 428.6 million tons in 2014, according to UBS.

China Coal Energy, the second-largest domestic producer, cut its output target for this year by 10 percent, Wu Jun, the Beijing-based president for sales, said at a press briefing on Aug. 18.Shenhua Group, the biggest producer, will reduce supply by 50 million tons, the Economic Information Daily reported on July 28.

Price Forecast

Qinhuangdao coal may average 555 yuan in the three months ending Dec. 31, up from 505 yuan in the third quarter, boosted by lower sales by producers, UOB-Kay Hian said in a report e-mailed on Aug. 25. Shenhua lowered its sales target by 11 percent from a year earlier for the second half of 2014, while China Coal cut its annual target by 10 percent, according to the report.

The biannual maintenance of the Daqin railway, which carries about a third of China’s rail deliveries of coal, may support a price recovery, according to the CCTD. The system, which links Qinhuangdao port with the coal-producing region of Datong, conducted unscheduled repairs from Aug. 7 to Aug. 12, probably tightening supplies, it said in a report on Aug. 8.

“The Chinese government has no choice but to introduce a policy to reduce coal supply to support the price,” said Tian Miao, a Beijing-based analyst at North Square Blue Oak, a research company inLondon that focuses on China. A reduction of as much as 300 million tons this year may help halt coal’s decline, she said by phone on Aug. 26.