China's coal barons struggle amid falling coal prices

A slowing economy and waning demand for coal have triggered an 11-consecutive-week price drop after a decade of robust development, arousing great concerns among China's coal enterprises.

However, industry analysts believe the situation for the world's largest coal consumer and the third-largest reserver won't last long, although more imports, less consumption and poor economic prospects threaten to sap demand.

The China Coal Price Index shows that China's benchmark power-station coal price fell for the 11th week as stockpiles at the Qinhuangdao Port in Hebei province, which boasts one of the country's highest export volumes, rose the most in six months on slowing demand.

Coal with an energy value of 5,500 kilocalories per kilogram slid by 1.96 percent to 641 yuan (about 100 U.S. dollars) per metric ton after 10 weeks of decline, data from the China Coal Transport and Distribution Association (CCTDA) showed.

According to the CCTDA report, in the last two months, the price slumped 23 percent from the same period in 2011, indicating unusually weak industrial demand.

Sales of coal resources in coal-rich regions such as Shanxi, Shaanxi and Inner Mongolia have been seriously affected as a result.

Guo Xutian, CEO of Xinshi Coal & Coking Co. Ltd., in north Shanxi province, China's second-largest coal production base, said the entrapped coal mine selling has resulted in lay-offs for two-thirds of workers.

"Sales were never a problem, but now, look at the coal piling up on the ground," Guo sighed, saying the company has been on limited production since April. X "The price dived by 80 yuan to 120 yuan a metric ton, even though we didn't put the brakes on production. We are barely making ends meet, gaining zero profit," said Ma Zhi, chairman of Jinhuagong coal mine's trade union with Datong Coal Mine Group.

Chinese demand for coal, which fuels three-quarters of the nation's power plants, has slowed as the cooling economy curbs electricity consumption.

China's power generation rose 0.7 percent in April from a year earlier, according to the National Bureau of Statistics. That was down from 7.2 percent in March and marked the slowest pace of growth in three years.

Thermal power-generated electricity, which accounts for over 60 percent of overall electricity generation, climbed 4 percent in the January-May period, indicating a strong sign of decline compared to 7 percent in the same period last year. Water-generated electricity consumption rose by 35 percent in the southern regions.

Coal stockpiles at the nation's biggest utilities rose to the equivalent of 28 days of consumption as of June 10, compared with 18 days in February, according to the CCTDA report.

Meanwhile, coal imports rose as international coal prices dropped. Data from the General Administration of Customs showed that coal mine imports rose 65.9 percent to 140 million tonnes in the first half of 2012.

However, Wang Hongying, chief of the Academy of Macroeconomic Research of the Shanxi Development and Reform Commission, saw the price drop as a natural periodic fluctuation under the principles of a market economy.

"The policies were sort of putting the brakes on real estate and other infrastructure investment, sapping demand, whereas unceasing coal production and growing imports offered an excess supply," Wang explained.

The trend will end in the coming third or fourth quarter, as infrastructure construction programs such as those for railways and highways will kick off, and foreign exporters will raise tariffs, Wang predicted.

According to a report with Australia & New Zealand Banking Group Ltd. (ANZ), international coal prices will remain under pressure until seasonal demand increases in the next quarter in China, where imports are being deferred amid the mounting stockpiles.

Signs of strengthened performance, however, have not fully eased the concerns of the coal industry. Coal owners are still unnerved about bloated inventories and waning consumption on electricity due to a slowing economy.

"We are on the move to improve the quality in order to meet the greater demands of consumers," said Du Chaoan, who is in charge of coal production with Shanxi Jincheng Architecture Mining Group.

Apart from an adjustment to coal production, China's main coal producers have stepped toward structural reform and technological development.

Hebei province has kicked off a new round of coal mine reshuffle to close and integrate small-scale coal mines, and Shaanxi has integrated six state-owned enterprises into one group in a bid to weather the storm.

Wang Shouzhen, an analyst from the Shanxi Coal Industry Association, said the government should play a role in properly reining in coal production while prompting an industry upgrade that will weed out unfit companies.

"The most sustainable way to solve the problem comes from the industry upgrade, technological innovation and associated governmental regulations," Wang added. "We may not expect the golden ages, though."