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Strong Prices Boost Yanzhou Coal’s Cash Flow; Production Constrained

Yanzhou Coal Mining Company Limited (BB+/Stable) and parent Shandong Energy Group Co., Ltd will see a strong increase in their profit and cash flow generation in 2021 on high commodity prices, despite constrained coal production, which supports Yanzhou Coal’s ratings, says Fitch Ratings.

Yanzhou Coal’s operating profit soared by 122% yoy to CNY19.2 billion in 9M21 on the coal mining and chemical segments. Shandong Energy’s operating profit rose by 47% to CNY37.3 billion and reported operating cash flow increased by 36% to CNY26.1 billion. However, the operating profit from non-Yanzhou Coal assets, calculated as the difference between the two companies, fell by 19%; the reason for the decline was not disclosed, but lower coal production could have been the cause. Shandong Energy’s capex rose by 37% to CNY16.0 billion, probably on large maintenance capex as well as expenditure in mining automation and on greenfield projects.

Prices of Yanzhou Coal’s self-produced coal averaged CNY495/tonne in 1Q21, CNY577/tonne in 2Q21 and CNY785/tonne 3Q21, based on the company’s disclosure and Fitch’s calculation. This was broadly in line with the trend in market prices. Qinhuangdao 5,500Kcal spot price more than halved to CNY1,250/tonne entering November, from the peak of around CNY2,500/tonne last month, as interventions from National Development and Reform Commission took effect. We expect volatile but still relatively high prices in 4Q21 on seasonally tight supply in the winter and lower inventory levels than in the past.

Sales of self-produced coal decreased by 18.6% yoy to 69.0 million tonnes (mt) in 9M21 on stricter safety standards and inspections and constrained production. On a sequential basis, sales volume recovered by 11.3% to 24.2mt in 3Q21, but this remained below quarterly sales of around 30mt last year. Sales from mines in Inner Mongolia declined by 39% yoy in 9M21 – the worst among Yanzhou Coal’s major producing areas – partly because of production bans in 2021 at mines at risk of rock burst. Sales in Shandong-located mines decreased by 32% yoy in 9M21, due to stricter safety and environmental policies, but showed some recovery in 3Q21.

Yanzhou Coal reported a unit mining cost of CNY329/tonne under China GAAP, up 40% from CNY235/tonne in 9M20, due mainly to lower production. The company has also recategorised transportation costs as mining cost from sales expense. Mining gross profit more than doubled to CNY463/tonne in 3Q21, from CNY202/tonne in 1H21, and averaged CNY293/tonne in 9M21 by our calculation. We think unit cost next year will depend on production recovery.

The chemical segment delivered a strong performance, with gross profit rising by 645% yoy to CNY5.8 billion in 9M21 amid a commodity bull market. The newly injected Lunan Chemical and Future Energy were the main contributors with strong products like acetic acid, acetic ether and liquid wax, while methanol from Yulin and Ordos plants also benefited from price recovery.
Source: Fitch Ratings

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