China's coal conundrum: Short-term crunch, long-term excess

Workers at a coalmine in Huaibei, Anhui province. [Photo/China Daily]

BEIJING - Barely a few months ago, Chinese policymakers were crititizing certain local authorities for not doing enough to curb excess capacity in the coal industry, but an unexpected price rally is now forcing them to shift focus on ensuring supply.

During the past two months, several top-level meetings have been called by the country's top economic planner, the National Development and Reform Commission (NDRC), to seek more supply to stabilize the market.

Authorities have pledged to ensure market supply without weakening capacity-cutting efforts, deciding to relax the limit on production days for efficient coal producers.

But so far, such efforts seem to little avail as the price rally continues.

The Bohai-Rim Steam-Coal Price Index, a gauge of coal prices in northern China's major ports, rose to 607 yuan ($89.9) per ton last week, the 18th consecutive rise and about 63.6 percent up on the start of the year.

The government's lengthy capacity-cutting campaign is believed to have played a major role in the price surge.

China is the world's largest consumer of coal. The industry has long been plagued by overcapacity and has felt the pinch over the past two years as the economy cooled and demand fell; addressing the issue has been on top of the government's agenda in the past few years.

The campaign has been effective. During the first three quarters of the year, China's coal output fell 10.5 percent year on year to 2.46 billion tons.

Official data also shows that by the end of September, over 80 percent of the 250 million tons of capacity up for the chop this year had already been eliminated.

The reduction comes amid China's booming property market, which increased demand for steel and hence for coal. That, along with widespread market speculation, have combined to push up prices.

Li Wenjing, industry analyst with commodities service provider www.100ppi.com, predicted coal prices will continue to increase in November and December as it takes time for coal producers to respond to government calls to increase supply.

In addition, rising demand for heating in the coming months will continue the price increases.

Li Hongsong, chief manager of the Inner Mongolia Coal Exchange Center, expects the price to see a correction around December, depending on government efforts to stabilize the market.

The NDRC is reportedly trying to push for medium-to-long-term supply and price contracts between producers and buyers to avoid drastic price fluctuations.

In the longer run, coal prices will be under notable pressure as demand for fossil fuels is set to retreat due to the development of clean energy and the green economy.

By 2020, China's coal consumption will reach 4.1 billion tons at most, while its coal production capacity will hit 4.6 billion tons even if capacity reduction goals are achieved, according to NDRC deputy secretary-general Xu Kunlin.

China has specified that it aims to increase its share of non-fossil energy to 15 percent by 2020 and 20 percent by 2030. Coal consumption will be limited to 62 percent of energy use by 2020.

That means the country still faces a tough task to slim down the sector and capacity-cutting should not be weakened, Xu said.

China plans to cut coal capacity by half a billion tons in the next few years, and vast funds have been set aside to help displaced workers.