China Coal: Tough Times Ahead, Majors In Better Position
BMI View: China's coal mining industry is set to encounter headwinds over the coming years as weak prices, along with the government's drive to consolidate the sector, force more marginal operations out of business. Major miners such as Shenhua Energy are better placed to withstand these challenges as they are often blessed with greater operating efficiencies due to their economies of scale. In contrast, the smaller players suffer from high delivery costs and funding constraints, making them especially vulnerable to a further slump in coal prices. These dynamics should aid in the country's plan to consolidate production amongst the largest producers over the medium term.
We believe the Chinese coal sector is set for more pain ahead. A growing number of domestic miners will buckle under falling coal prices, rising seaborne competition and an intensifying funding squeeze over the coming years. In particular, Beijing's efforts to slash overcapacity and curb pollution in the coal sector should herald further mine closures over the medium term. According to the National Energy Administration, China will close 1,725 small-scale mines with a total capacity of 117mn tonnes (mnt) in 2014. Depleting mines in the east of China will be forced to cease operations, while production in a series of coal energy bases in certain parts of the country, including Inner Mongolia and Xinjiang, will be consolidated.
We expect a greater number of smaller players to be relegated to the sidelines in the coming years. Anecdotal evidence suggests that many smaller coal miners have gone out of business over the past months. Specifically, miners in the land-locked northern province of Inner Mongolia are especially vulnerable to the slump in coal prices due to their high delivery costs. The squeeze on credit lending to the coal industry is further threatening the survival of domestic miners, with the Chinese government pledging to introduce more sustainable economics in the heavy industries. In January 2014, China's Banking Regulatory Commission ordered its regional offices to step up their scrutiny of credit risks in the coal mining industry following the collapse of Liansheng Resources.
|Qinhuangdao Steam Coal (USD/tonne)|