Losses may spur Shanxi coal recast

A worker uploads coal at a railroad yard in Huaibei, Anhui province. XIE ZHENGYI / FOR CHINA DAILY

Mining firms in key province struggle despite rebound in commodity prices

Mergers or restructuring will dominate the coal industry in the northern province of Shanxi after three major mining groups reported first-quarter losses, industry insiders said.

Out of the seven leading companies in the sector, Datong Coal Mine Group, Lu'an Group and Shanxi Coking Coal Group have struggled to balance their books, despite the rebound in coal prices.

Industry insiders now expect a series of mergers or restructuring to solve debt problems that are "extremely high" in these key players.

"Debt asset ratios of the three groups are up to 70 to 80 percent," said Zhang Min, an analyst from Sublime China Information Group.

"They have borrowed a large amount of money from banks and other lenders to diversify their operations, not only during the downturn period (2010-15), but also during the prosperous time (2000-09)."

The problem, according to Zhang, is that Shanxi's coal giants are involved in too many other businesses, such as the coal-to-chemical sector and the real estate industry, as well as tourism and agriculture.

"This has caused problems because they have high interest payments (after borrowing from banks to buy new acquisitions) every month, which leads to higher costs," she said.

Shanxi is the largest coal producing province in China, but the industry badly needs to reform.

The local government called on State-owned enterprises, or SOEs, in the mining sector to report on their main business activities by Friday, so strategic and development goals can be established at these sprawling companies.

This followed a decision by Shanxi's local government to publish a "guidance on deepening reform of State-owned enterprises and assets" in the province last month.

By 2020, the document stated that SOEs should be transformed into high-end companies, while traditional industries should be reorganized through restructuring and mergers to optimize resources.

Industry analysts pointed out in the Securities Daily that these moves prove that integration of the coal sector in Shanxi is accelerating.

"But the overall process will not be quick because it spans too many businesses and several different groups," said Zhang at Sublime China Information Group. "The negotiations will take a long time."

Figures showed Datong Coal Mine Group reported operating revenue of 37.8 billion yuan ($5.5 billion) and a loss of 291 million yuan in the first three months.

During the same period, Lu'an Group made a loss of 14 million yuan, while Shanxi Coking Coal Group also slipped into the red without releasing detailed financial figures

China's coal sector achieved continued profits in the first five months of this year, compared with losses in the same period last year, according to data from the Ministry of Finance.