China Puts Coal Production Capacity on Chopping Block

Updated on
  • Aims to cut 500 million tons of capacity; consolidate output
  • Coal follows steel as Xi Jinping seeks to cut industrial bloat

China plans to chop coal production capacity as part of efforts by President Xi Jinping’s government to cut industrial overcapacity and use cleaner energy sources amid sliding demand for the fuel.

The world’s largest coal consumer aims to eliminate as much as 500 million metric tons of annual output in three to five years, the State Council said in a statement Friday. The country also plans to consolidate an additional 500 million tons a year of capacity among fewer miners, ramp up financial support for some coal companies and encourage mergers, according to the guidelines. All coal companies should be able to produce least 3 million tons a year, it said.

The 500 million-ton target could erase almost 9 percent of China’s capacity. Including projects under development, the country can produce 5.7 billion tons, the Economic Daily reported last month, citing Jiang Zhimin, a vice chairman of the China Coal Industry Association. Only 3.9 billion of that is in operation, according to the association’s estimates.

“The document does set some aggressive targets, which highlights the determination of the central government to ease oversupply,” Deng Shun, an analyst with ICIS China, said by phone from Guangzhou. “There will still be some tug-of-war between the central and local governments on when and how those targets can be achieved.”

Economic Shift

Coal demand has slid as China’s economy slows and the government seeks to curb pollution in the world’s biggest producer of carbon emissions. China will also suspend approvals of new coal mines for the the next three years, according to the statement from the State Council, the country’s highest administrative body.

“By 2020, the overcapacity issue should be improved,” said Helen Lau, analyst at Argonaut Securities (Asia) Ltd. in Hong Kong.

Shares of Chinese coal mining companies such as China Shenhua Energy Co. surged last month after Premier Li Keqiang urged support for the industry and said production should be cut and costs reduced. The government plans to set up a fund to help coal miners and steelmakers cut workers and dispose of bad assets, Li said during a meeting in Shanxi, according to a China Central Television report on Jan. 7. The nation’s coal imports fell the most on record to the lowest in four years last year amid weak domestic demand.

The plan comes a day after similar scheme for the country’s steel industry was unveiled. The world’s biggest producer will close between 100 million and 150 million metric tons of annual crude steel capacity by 2020, according to an outline published on the state council’s website Thursday. The steel industry cuts -- amounting to 13 percent of capacity at most -- fall short what’s required, according to analysts from Capital Economics Ltd., Macquarie Group Ltd. and Argonaut Securities.

— With assistance by Jing Yang

(Corrects to clarify amount of production to be cut in first three paragraphs of story originally published Feb. 5.)
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