China's coal industry freezes over

Coal provides nearly two thirds of China's energy, but for mining companies, this winter could not be more chilly.

The government has done its best to save the day, but it is not enough to force up the price of coal, even in the short term and the outlook for the coming year is no better.

An already grim situation is made worse by weak demand, overcapacity and a large amount of imports, according to Jiang Zhimin, vice president of the National Coal Association (CNCA).

Rating agency Fitch called 2014 a difficult year for coal miners in China, with prices sliding by about 20 percent.

There is a lower demand for thermal coal stemming from an array of one-off factors like the higher than average rainfall that helped hydropower generation.

The government imposed import duties ranging from 3 percent to 6 percent in October and banned domestic production and imports of low quality coal.

Jiang expects oversupply and pressure on miners to remain in 2015, as China seeks environmental protection and quality growth with clean energy, but coal production actually dropped last year for the first time since 2000, and Jiang predicts another 2.5 percent drop this year.

Coal stockpiles with miners stand at around 87 million tonnes, up 2.6 percent from this time last year. Worse yet, power plants have 95 million tonnes piled up, waiting to be burned; 17 percent more than a year ago. Major coal companies recorded profits of 110 billion yuan (18 billion U.S. dollars) in the first 11 months of 2014, down 44.4 percent.

CNCA analyst Zhang Hong believes the oversupply headache won't go away any time soon and the entire sector will come under huge pressure this year. "Demand is slowing. Overcapacity is yet to be digested and environmental constraints are constantly in the headlines as we transform the growth mode," he said.

Fitch holds no hope for a meaningful upswing in coal prices in 2015. Substantial capacity investments from previous boom years are still being digested, while demand has weakened.

As the government strives for more renewable energy at the expense of coal in the longer term, thermal coal consumption is set to decline. As the world's largest consumer of coal, China burns as much as the whole of the rest of the world combined. Nearly 70 percent of its energy comes from coal, a proportion much higher than in developed countries, which use cleaner resources like oil and gas. China has the world's third-largest coal reserves but lacks gas and oil.

Miners are under greater pressure than ever to control pollution, with the bar for reducing carbon emissions per unit of GDP set very high. In 2013, emissions per unit GDP had dropped by 29 percent from 2005 levels and in 2014 fell by another 4.8 percent. At that rate, the target will be met well in advance.

Fitch also underscored the need to preserve cash flow, since many coal producers undertook debt-funded capital expenditure and investments when coal prices were high between 2009 and 2012, a toxic mix in current conditions. Cost control and leverage reduction will be important strategies for companies to maintain stable credit quality.