Shanxi’s coal own-goal

Could be why coal output’s down

Herbert Hoover’s experience of the Chinese coal industry is not a well-known one. But long before America’s 31st president stepped into the Oval Office, he had Chinese patriots up-in-arms, when he served as general manager of a very controversial mine.

Kaiping was China’s first large scale coal mine. In 1899 it counted as the country’s top industrial enterprise. But following the Boxer Rebellion that year, the mine was seized by the victorious European and American powers. A 27 year-old Hoover was put in charge. The mine became a cause célèbre for Chinese nationalists, who tried and failed to recover it through British courts.

It just goes to show that tussles over mines and property rights date back a long way.

A lot more topical than the struggle over Kaiping are the battles being fought between mining entrepreneurs and the Shanxi provincial government. As we previously reported in WiC (see issue 1), the local government concocted a plan to consolidate 2,600 privately-owned coal mines into eight state-owned firms. Mines below a certain size were either to be closed or forced into the arms of the state behemoths. The larger coal barons, who baulked at some of the valuations on offer, found that their mines were closed ‘indefinitely’ due to health and safety infringements.

The Chinese press has been looking again at Shanxi in recent weeks. CBN Weekly is still pretty uncomfortable with the whole Don Corleone-like consolidation process. “In a market-oriented system,” it opined, “a corporate merger contract should be established on the basis of compliance with the common interests of party A and party B instead of being enforced by executive power.”

But enforcement seems to have proceeded regardless. Nanfang Daily reports that there are now only 1,053 mines in Shanxi.

It turns out the plan has had other consequences too. Shanxi – previously China’s biggest coal producing region – saw output fall by 41 million tonnes. Coal prices have gone up too. Industry expert Li Chaolin told the China Times: “Because the smaller coal mines had a lower development cost, their coal prices were lower. After the shutdown of the small coal mines we have lost low cost coal resources, and this means coal prices have risen.”

In fact, the country struggled with coal shortages during the recent snow storms, leading to disruptions in electricity supply – Reuters classified it as the country’s “most severe power shortage ever”. The brownouts hit 13 provinces as demand outstripped supply by nearly 70 gigawatts, or the equivalent of most of Britain’s generating capacity. Li reckons that Shanxi’s shuttering of smaller mines heightened the crisis.

The National Development and Reform Commission (NDRC) is also ruing the Shanxi government’s move – at least in the short term.

While it and other policymaking bodies are known to favour consolidation, the loss of cheaper coal supplies has made for another round of tough negotiations between the power companies and the big state coal miners such as Shenhua.

These negotiations – which set the contract coal price for the year – have become an acrimonious annual ritual. No wonder: with the power firms unable to charge more for electricity, they have been racking up mounting losses. As coal- fired power makes up 60% of their generating capacity, rising coal prices have hit hard.

According to the China Times, power industry executives are morose. Last year they lobbied for a coal price of Rmb400 per tonne, and ended up paying Rmb540. This year the contract price rose again, with the NDRC hammering out a compromise deal of Rmb570 per tonne, amid surging spot prices.

This wouldn’t be such a problem if the government put up electricity prices commensurately. But it’s more worried about fuelling inflation (see Talking Point) than the power firms spilling red ink.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.