In 2008, coal was selling at 1,100 yuan a tonne. Now after four years continuous decline, the price is half, and still falling. Chinese coal bosses in Shanxi wonder where will it end?
In the past six months, Shenhua Group has cut prices 7 times. This approach has been criticised by the rest of the market, with one expert warning this could be enough to push large scale coal producers under.
“The profit from selling one tonne of coal won’t even buy two bottles of coke”. Hearing distress calls from coal mines, many local governments have made attempts at rescuing the industry. This time around, the NDRC and National Energy Administration, have implemented limits on coal mine output. For large coal mines, this means reducing output by 10%. For small coal mines (annual output less than 90k tonnes) it means closing altogether. And in the pipeline are policies to raise coal import tariffs, and ban imports of inferior grade coal.
And if it wasn’t tough enough being a coal miner in China already, news keeps coming of further wage cuts. With prices at their lowest in six years, around 479 per tonne, an insider in China Coal said many firms are making losses, and so wages cuts are commonplace.
Data from the China National Coal Association shows up to 70% of coal mines are making losses, with over 50% already either cutting wages, or not paying at all. Data for Shanxi province shows that the average profit from selling one tonne of coal in the first quarter of the year was just 5.72 yuan, a YoY fall of almost 70%.
Of course this market oversupply was the result of the Chinese governments massive credit stimulus, post financial crisis in 2008. The ultimate destination of the 4 trillion yuan package was left unchecked, and resulted in many government dominated industries experiencing oversupply.
The mounting losses in Shanxi’s coal industry have twice this year been the trigger for two potential trust fund defaults, and raise concerns over China’s shadow banking sector. (See this previous chiecon post for more).
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