China's Job-Saving Coal Fix May Mean More Trouble in Appalachia

  • Biggest coal region proposes boosting exports to save industry
  • Coal mining faces a 9% capacity cut, 1.3 million job losses

China’s biggest coal region has a fix for the country’s glut that may send shivers through miners from the U.S. Appalachian Mountains to Australia’s Hunter Basin.

The Chinese government wants to shut roughly 9 percent of its production capacity to shrink its industrial sector and clean its polluted skies. That means dismissing 1.3 million coal workers, risking social unrest that Beijing wants to avoid. An alternative touted by the northern province of Shanxi, which produces more coal than any country other than China, is to keep mines running and ship the excess overseas.

As its economy slows and shifts from manufacturing, China’s confronting the aftermath of decades of expansion that left it with excess industrial capacity. It’s responded by raising exports, causing havoc for global steel producers, aluminum smelters and oil refiners. If its biggest coal producers follow suit, it spells trouble for a market beleaguered by the weakest prices in a decade.

“China increasing exports would come at the exact wrong time -- that’s the last thing the market needs,” said Andrew Cosgrove, an analyst with Bloomberg Intelligence. “Everyone else is doing their job of cutting supply. It would just ding whatever kind of light there was at the end of the coal supply-demand tunnel."

Shanxi produced 944 million metric tons last year, the biggest contributor to China’s 3.68 billion tons of output and more than the entire U.S., the world’s second-biggest producer. The Asian nation imported 204 million tons in 2015, down 30 percent, while exporting only 5.33 million. China’s coal industry employs more than 6 million people.

The province said in a proposal this month that it will control new projects and seek overseas markets. Shanxi, dependent on coal-related industries for 80 percent of its economy, is proposing that the central government reduce or scrap export quotas and cut taxes.

Two calls to the Shanxi government’s press office weren’t answered on Tuesday.

The coal market began collapsing in 2011 as a global glut swelled. Prices have fallen 60 percent as purchases by China, the world’s biggest consumer, shrank. Asian benchmark thermal coal dropped to $47.37 a ton in January, the lowest since 2006, according to Globalcoal, a London-based developer of an electronic trading platform.

Growing Surplus

China’s demand is set to decline a third year. The global glut will worsen if China boosts shipment, said Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong.

“For the seaborne market in Asia and major producers in other countries, it’ll bring additional woes,” Lau said.

China Shenhua Energy Co., the country’s biggest coal producer, may boost exports as much as eightfold to 10 million tons, Vice Chairman Ling Wen said Tuesday. The company shipped 1.2 million tons last year, according to its annual report.

Competition from China may be the last thing producers need. At least six U.S. coal miners declared bankruptcy in the past two years, crushed by falling demand, massive debt, mounting environmental regulations and competition from natural gas. U.S. production fell last year to the lowest in decades and is seen declining further.

The combined market capitalization of publicly traded U.S. coal miners was $5.9 billion Tuesday, down from $77 billion in 2011, according to data compiled by Bloomberg.

In Australia, miners including Peabody Energy Corp. and Anglo American Plc are selling assets, while Cockatoo Coal Ltd., a Queensland-based miner, went into administration last year.

Steel Experience

Miners need only look to steel producers to see the potential effect of Chinese shipments. The country exported record volumes of the alloy last year, depressing prices, hammering mill profits worldwide and spurring trade tensions. ArcelorMittal, the world’s biggest producer, posted a full-year loss, while U.S. Steel Corp. has led efforts to resist imports, describing the situation as a “major war.”

While China’s steel exports represent about 15 percent of output, coal exports account for only 0.1 percent. Thermal coal, used in power generation, makes up more than 20 percent of the shipments, coking coal, used for steel making, accounts for roughly 18 percent, while the remainder is classified as anthracite, a high-quality, cleaner-burning form of the fuel, according to customs data and ICIS-China, a researcher.

About 60 percent of Shanxi’s output is coking coal and 30 percent thermal coal, while the reminder is anthracite, according to China Coal Resource, a Shanxi-based researcher.

Not Enough

Even if exports doubled -- as they have in the first two months -- that’s still too little to solve China’s overcapacity, according to Michelle Leung, a Hong Kong-based Bloomberg Intelligence analyst. Shipments have declined since 2004 as the government lowered rebates and introduced export taxes and licenses -- a move that’s potentially reversible.

“The decline of China’s domestic consumption and its crackdown on pollution suggest China may boost exports again by easing policies, such as cutting export taxes or by opening up the licensing system,” Leung said.

China’s coal is also at a disadvantage because of high production and transportation costs, said David Fang, a director with China Coal Transport and Distribution Association.

Shanxi’s proposal illustrates the balancing act by China’s policy makers. The province said it hasn’t been successful nurturing industries outside of coal, and is now focused on easing the burden on state-owned miners. Closing mines will "pose risks to social stability," Shanxi said in an economic and social blueprint distributed at the nation’s annual parliamentary meeting this month.
“It will inevitably bring pain to companies and local economies,” said Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd., a research company. “The central government is serious this time about cutting overcapacity,”

— With assistance by Jing Yang

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