Chinese Provincial Coal SOEs Accelerate Consolidation
China’s coal-rich provinces have accelerated the consolidation of state-owned coal companies amid falling coal prices and declining earnings, driven by weak demand due to the coronavirus pandemic, says Fitch Ratings. The greater sector concentration can help to rationalise competition and improve price stability over the medium-to-long term.
The Shandong government recently announced the merger of Shandong Energy Group and Yankuang Group to create China’s second-largest coal producer with around 8% production share. The two state-owned enterprises (SOE) have large overlaps in their major businesses and the merger will probably help them optimise resource allocation and improve operational efficiency. The combined group will also be one of the province’s largest employers and domestic bond issuers.
Local press reported that the Shanxi provincial government plans to consolidate SOEs operating in the same value chain under one roof to boost their competitiveness. This includes the consolidation of the chemical businesses of Lu’an Mining Industry Group Co., Ltd, Yangquan Coal Industry (Group) Co., Ltd, and Shanxi Jincheng Anthracite Mining Group Co., Ltd and the potential merger of their coal assets, which the local media said is likely to create the nation’s third-largest coal producer.
Fitch expects continued efforts to optimise the coal industry’s structure as there are still over 5,300 mines and nearly 900 have a capacity of less than 0.3 million tonnes each. Rising industry concentration and the exit of uncompetitive producers will be conducive for more rational competition, which can help to reduce price volatility over the medium term. Supply-side reforms since late-2015 have raised the top-10 Chinese coal producers’ share of the industry’s output to 44.5% in 2018 from 40.2% in 2016, while the average mine size has risen to 1.16 million tonnes per year in 2019 from 0.85 million tonnes per year in 2017.
Continued industry restructuring, however, is unlikely to lower coal supply as new advanced capacity increases. The Chinese government introduced a capacity replacement programme for the coal industry in 2016, limiting the capacity of new mines to that of closed facilities but loosened the restriction in 2017 to allow the addition of 130% of the closed capacity for trans-provincial replacements to encourage trans-provincial consolidation. China had one billion tonnes of coal capacity under construction in 2019 versus annual production of 3.75 billion tonnes. Coal production increased by 0.6% yoy to 1.81 billion tonnes in 1H20 despite some disruptions caused by COVID-19.
Sufficient capacity will provide the government with more flexibility to manage medium- to long-term coal prices. The Chinese government set a target price range of CNY500-570/tonne for the 5,500kcal/kg grade coal in January 2017, which is not too low for coal producers and not too high for power-generation companies. The government has utilised various policy tools to manage coal prices in recent years. These include temporary adjustments of import quotas, working days for coal mines, and frequency of safety and environmental protection checks as well as long-term policies to control the pace of new mine approvals and shutdowns of small and unsafe mines.
The benchmark Qinhuangdao 5,500kcal/kg coal price fell to a low of CNY465/tonne in late April 2020 and is now hovering around CNY580/tonne due to a demand recovery, restrictions on imports, lower supply of hydropower in May, and miners’ production cuts when prices were low. CRU reported in mid-July that the National Development and Reform Commission had urged Chinese coal miners to increase production during the summer peak season and to not allow domestic prices to rise further.
Source: Fitch Ratings