Oversupply of coal squeezing profits

China is facing an oversupply of coal in 2012, as coal production is maintaining a high growth rate even though growth in consumption has declined and inventories are high, a top energy official said Thursday.

Increasing output, weakening demand, high stocks and falling prices are major problems for the country's coal industry, Wu Yin, deputy head of the National Energy Administration, said at a forum in Beijing.

Domestic coal consumption grew by 1.4 percent year-on-year in the first eight months of 2012, down from the 10.1 percent growth seen in the same period of 2011, according to Wu.

Wu attributed the consumption slowdown to several factors: increasing supply from hydropower plants, cheaper imported coal, and sluggish demand from energy-intensive industries like power generation and steel and cement manufacturing.

China's coal import volume grew by 46.3 percent year-on-year to 185 million tons in the January-August period of 2012. It is already more than the country's total coal import volume in 2011, customs data showed.

"A drop in coal prices is good news for thermal power plants in reducing costs, but the main problem they face is decreasing demand for electricity generation," Li Ting, an analyst at the Distribution Productivity Promotion Center of China Commerce, told the Global Times Thursday.

"The moderate decrease in coal prices is helpful in relieving conflicts between coal producers and electricity generators," Wu said. "However, a sharp price drop will erode the profitability of coal producers and might cause safety problems in coal mines."

The coal industry is suffering from cut-throat competition, so consolidation in the industry should be speeded up, Bu Changsen, chairman of Shandong Energy Group, said at the same forum.

Coal producers could also extend their business chains to downstream sectors such as coal transportation and power generation to increase margins, Bu said.

China produced 2.57 billion tons of coal in the first eight months of 2012, up 4.4 percent year-on-year. But the government aims to keep the annual growth rate within 4 percent this year, Wu said.

"The 4 percent ceiling could easily be surpassed," Liu Dongna, an analyst with Sublime China Information, told the Global Times Thursday.

"Some coal mines that had reduced production in past months have gradually increased production, as coal prices rebounded a little recently," she said.

The Bohai-rim thermal coal price index, which tracks spot thermal coal prices at China's six major ports, rose 0.31 percent week-on-week to 637 yuan ($101) per ton Wednesday, although it is still down 24 percent year-on-year.

Coal prices might rise slightly in the fourth quarter, boosted by increasing demand in the winter season and lower hydroelectric output, Liu noted.