Energy & Resources

The pits of despair

What’s good for power companies is bad for coal miners

CHINA-CLIMATE/

Now going cheap

When the daughter of coal baron Xing Libin got married on the island of Hainan last year, the media was agog at the extravagance. The bride’s dowry boasted six Ferraris and guests were entertained by a bevy of celebrities including Taiwanese crooner Jay Chou (see WiC 144).

Opulent weddings for the families of coal industry tycoons seem to have been something of a fixture in recent years but the Xing wedding may turn out to be a highwater mark. Coal mining might have grown into one of China’s largest industries, employing millions of people, but with coal prices down about a third from the end of 2011, the industry is struggling.

One analyst speaking to 21CN Business Herald estimates that average net profit in the industry fell by around 50% in the first quarter alone.

On the flipside, cheaper coal has been a boon for power companies, which just a few years ago were desperately scrambling to ensure access to sufficient supply, but not overpay for it (a frustrating exercise, as it turned out, which led to much arguments between the two industries, see WiC3). Formerly the balance of power was tilted firmly in favour of the miners. But weakening demand for coal has put the power companies back in the more dominant position.

“Now the power plants have become arrogant, and it is common for them to owe us money,” the supervisor at a mine in Shaanxi province told CBN, complaining things have got so dire that his firm is even having to employ a public relations team to go out and market its coal.

Outstanding payments at Shaanxi’s largest coal company, Shaanxi Coal Selling and Transportation Group have risen to Rmb1.6 billion ($261 million), compared to just Rmb358 million earlier this year, reports CBN.

Sales are down in part due to lower demand for electricity. But with prices thought to be on a downward trend, it doesn’t make sense for power providers to stock up on coal. Cheaper raw materials are a windfall. In 2012, profits at the five largest power generation groups totalled Rmb46 billion – the best year for the sector ever.

In fact, the power companies are in something of a sweet spot. Although coal prices have fallen, the price of electricity has not been reduced, a trend that analysts expect to continue until the end of the year.

In the meantime, local governments are jumping in to help companies in the coal sector. In Inner Mongolia, the city of Erdos said it would continue to offer preferential tax rates to coal companies, while in Lanzhou in Gansu an emergency fund is being proposed to stabilise the price of coal, reports 21CN.

The broadest measure under consideration is a proposal made in May to stop the import of lower quality coal, which accounts for a fifth of China’s total coal imports, reports the Financial Times.

The reason that the government is so keen to help out the coal industry is because it is a major contributor to the tax coffers. During the first half of last year, miners in coal-rich Shanxi province contributed a little over 60% of local value added tax, reports 21CN, pointing out that this proportion is now in decline.

Other local governments are encouraging their miners to merge. Badong County in Hubei recently combined 21 coal companies into five groups; and there has also been a merger between two large coal firms in Shanxi.

Bigger picture, the central government in Beijing continues to foccus on reducing the share of coal-fired power feeding the national grid, promoting alternative forms of energy such as solar, wind and nuclear.

And while a coal-free China is a long way off, the industry’s golden age might be in the past.


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