The coal goal

Shanxi coal barons: best days behind them?

In a leafy villa suburb of Beijing there is mansion owned by a Shanxi coal baron that stands out from those surrounding it. If ever you could call a house ‘bling’ this would be it: the entire exterior is clad in marble. A vision of opulence, if not necessarily of taste, the mansion is a monument to the fortunes made by Shanxi’s coal tycoons. But the barons’ era is over.

Shanxi is the coal capital of China, and during the past couple of decades its coal resources have been exploited by a host of private sector firms. Shanxi’s provincial government has now mandated that there should be consolidation.

The government’s goal is simple enough. It wants the province’s coal resources to be controlled by fewer companies, such as Datong Coalmines Group and Shanxi Coal Transportation and Sales Group.

In a somewhat Marlon Brando-esque way the smaller players have been made an offer they can’t refuse. If they don’t sell up, their mines will be shuttered for safety reasons. So far Shanxi Coal Transportation and Sales Group has successfully acquired 28 smaller mines in Zuoyun County. Hundreds of others have been acquired throughout the province.

“Our days have passed,” rues Huang Jiang, a mine owner from Hunyuan, Datong. His mine has an annual capacity of 300,000 tonnes and together with seven neighbouring mines has been targeted in the consolidation campaign.

Huang’s is not a happy story. He sunk Rmb200 million ($29.2 million) into his business, which he opened two years ago. However, as he told the 21CN Business Herald, his coal mine has been shut down for the past five months, costing him Rmb10,000 per day. It remains closed – as are the other seven – because he (and the other mine owners) and Shanxi Huihengshan Baichuan Mining (SHBM) have been locked in negotiations over the price they’ll be paid for their properties.

The problem is in valuing the reserves. The eight mines are sitting on 230 million tonnes of coal.

SHBM reckoned Rmb2.25 per tonne was a fair price for the reserves. The mine owners thought that was too low and began to haggle, quoting prices from a low of Rmb3 per tonne right up to a somewhat belligerent Rmb20. Finally, six of the eight mines agreed to prices of between Rmb3-5 per tonne, and SHBM decided to pursue deals with them, and deal with the two holdouts later. Huang was one of the six to agree, and he thought the matter closed. But two days later, the local government announced that, as a state-owned enterprise, SHBM could invoke pricing based on Statute Number 83 – a complicated formula published in September last year. The mine owners soon grasped they’d be worse off.

For example, a mine worth Rmb300 million under the initial methodology shrinks to Rmb60 million under the terms of the statute. Not surprisingly talks have now stalled.

The provincial government has stated that no coal enterprise can remain independent if its annual production is less than 3 million tonnes. The ultimate goal is for 75% of total output to be controlled by 5-8 firms, with the biggest groups mining 100 million tonnes of coal per year.

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