Black mood

Heading for the pits

In 2009 China was roundly condemned in much of the West for doing its best to undermine the Copenhagen climate summit. Typical was an editorial in the UK’s Guardian newspaper: “China wrecked the talks… deliberately humiliated Obama and insisted on an awful deal so Western leaders would walk away carrying the blame.”

This December world leaders meet again in Paris for a new climate summit which they hope may lead to a legally binding agreement. But this time it may be China that emerges as a beacon of hope in its battle to cut greenhouse gases.

The irony will not be lost on Barack Obama who sat and watched Xi Jinping announce the world’s largest cap and trade programme during the Chinese president’s US visit in September (Obama failed to get his own programme through the Senate in 2010).

One contributor to financial website Seeking Alpha recently applauded China, stating that the “world has never seen a superpower so committed to climate change”. One year ago, Xi said Chinese greenhouse gas emissions would peak in 2030. (Though estimates of China’s ‘peak carbon’ have been muddied by America’s Energy Information Administration – it recently stated China’s actual coal consumption in the decade to 2013 was 14% higher than previously thought.)

The biggest domestic loser in this turnaround is the coal industry, which still accounted for 66% of China’s energy consumption in 2014. The industry’s latest quarterly results illustrate just how badly coalminers are faring. China Daily reports that 14 out of 27 companies have so far reported losses, led by Hong Kong-listed China Coal Energy, which derives 100% of its revenues from fossilised carbon.

It lost Rmb701 million ($110 million) in the third quarter ended September, down 29% year-on-year. Save for an extraordinary turnaround in the next few months, which China Coal reckons is very unlikely, the state giant is set to report its first full-year loss since its listing in 2008.

During the same period, Yanzhou Coal, which is also wholly reliant on coal, saw profits decline 34% from 2014 to Rmb743 million. Shenhua Energy, which derives only about 31% of group profits from coal, saw profits drop 20% quarter-on-quarter to Rmb5.3 billion.

In all three cases, results have actually beaten analysts’ expectations but that is only because of the prevailing pessimism on coal prices. China Daily says companies have been cutting their average selling prices to shift the nation’s massive coal inventory, which has sat at over 300 million tonnes for the past 45 months.

The whole industry has also been cutting costs and capital expenditure. China Coal, for example, has spent just under half of its projected Rmb8.2 billion capex in 2015. Longmay, the biggest coalminer in the country’s northeast, will shed 100,000 of its 240,000-strong workforce over the next couple of months after reporting losses of Rmb5 billion in 2014. The Heilongjiang-based company has established a special centre to help jobless miners retrain.

The government’s new ‘green dispatch system’ should deepen coalminers’ woe.

China published this week its 13th Five-Year Plan, which will begin next year, and reiterates it will prioritise power generation from renewable sources – giving them privileged status in grid accesss over fossil fuel generated electricity. This might see excess coal-fired capacity shuttered (there’s a fair bit of it: the previous system favoured the construction of new plants).

The Economic Information Daily also reported last week that the State Council will cut on-grid prices of thermal electricity for the second time this year, a move which could reinforce the downward trend in coal prices and hit struggling coalminers.

Any changes will have a huge impact on greenhouse gases given China accounts for more than half of global coal consumption.

As such, Chinese analysts believe the outlook for coal firms will be grim over the next five years. And not everyone is convinced prices have bottomed, even after the benchmark rate for thermal coal at Qinhuangdao fell last week to Rmb380 per tonne, a record low after a 27% dip this year.

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