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News Extra: China coal mine closure plan too successful

01 December 2016

China has been seeking to curb overcapacity in its coal sector by closing smaller, less efficient mines. According to state news agency Xinhua, as recently as a few months ago Chinese policymakers were cricitising certain local authorities for not doing enough to implement the closure programme. Now, however, restricted supplies and a surge in demand have led to an unexpected increase in coal prices.

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China’s coal industry has long been plagued by overcapacity, poor safety standards and inefficiency, particularly in the country’s smaller mines. The large surplus of production over consumption became even more of an issue in recent years as the country’s booming economy slowed. The Government ‘s response to this was a top-priority plan to close less efficient producers.

That campaign has been effective, Xinhua says. During the first three quarters of 2016, China's coal output fell 10.5% year on year to 2.46 billion tonnes. Official data also showed that by the end of September, over 80% of the 250 million tonnes of capacity scheduled for closure this year had already been eliminated.

This has created its own problems. Coal shortages have led to a price rise of more than 60% since the beginning of the year on the Bohai-Rim Steam-Coal Price Index, a gauge of coal prices in northern China's major ports.

Over the past two months, crisis meetings have been called by the country's top economic planning agency, the National Development and Reform Commission (NDRC), to seek more supply to stabilise the market.

Starting in late September, the NDRC asked coal producers to boost supplies and pressed two of the largest mining groups to sign long-term supply contracts with utilities at a quarter below current spot market rates. The agency reasons that more medium-to-long-term supply and price contracts between producers and buyers will curb price fluctuations.

The government has also said it will relax the limit on production days for efficient coal producers, without weakening capacity-cutting efforts. A further measure will be to allow some operators to reopen closed mines in a bid to top up power producers' inventories ahead of winter.

The capacity-cutting campaign is a major reason for the price surge. This reduction in production comes at a time when China's property market is booming, which has increased demand for steel and hence for coal. In addition, rising demand for heating in the coming months is likely to reinforce the price increases.

By 2020, China's coal consumption will reach 4.1 billion tonnes at most, while its coal production capacity will hit 4.6 billion tonnes even if capacity reduction goals are achieved, according to NDRC deputy secretary-general Xu Kunlin. This means the country still faces a tough task to slim down the sector and capacity-cutting should not be weakened, he said.

Ongoing efforts to cut coal capacity will have serious effects on employment in the sector, and Xinhua says the government has set aside significant sums to help displaced workers. In September 2015, one company alone, Heilongjiang Longmay Mining Holding Group, laid off 100,000 miners.

In the longer run, coal prices should fall as demand for fossil fuels retreats due to the development of clean energy and the green economy.

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

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