Energy & Resources

Black and blue

Trouble for a northeastern coal giant

A villager selects coal at a local businessman Sun Meng's small coal depot near a coal mine on the outskirts of Jixi in China

On either side of the Pacific Ocean, the world’s two largest economices have been grappling with the human consequences of shifting their economies away from polluting fossil fuels.

In the US, the fallout has been markedly political, with a clear swing to the Republican Party in the country’s Appalachian coal-producing states. Democratic frontrunner, Hillary Clinton, is trying to counter this with a $30 billion plan to create new jobs in the effected areas. However, its details were buried under a torrent of bad publicity, after rivals seized on her comment that she will put “a lot of coal miners and companies out of business”, without adding the rejoinder that she wouldn’t forget “the people who did the best they could to produce the energy we relied on”.

The rise of Clinton’s Republican counterpart, Donald Trump, has also been partly attributed to the economic malaise of the white working class. Trump professes to love coal and plans to get West Virginia “rocking” again by scrapping the Environmental Protection Agency (EPA). According to Trump, the EPA’s stranglehold over business means America is “practically not allowed to use coal anymore”. And he added, “What do we do with our coal? We ship it to China and they spew it in the air.”

The evidence from the US Energy Information Administration shows Trump’s rhetoric does not match the facts (not for the first time). It estimates the US produced 900 million short tonnes of coal in 2015, with roughly 0.5 million tonnes exported to China.

But if there is one thing China does not need more of it is coal. At the end of 2015, it recorded its 48th month of 300 million tonne inventories, compared to 128 million tonnes back in 2011 before prices and demand began falling.

The issue took centre stage during the National People’s Congress (NPC) last month. China may be a one-party state, but its officials still fear the political consequences of social instability when the government seeks to reduce industrial overcapacity. And this was amply demonstrated when mass protests erupted in the mining town of Shuangyashan following ill-advised remarks by Heilongjiang’s governor, Lu Hao.

Lu had told delegates the situation was difficult, but that the miners were still getting paid. This was news to the roughly 200,000 employees of Heilongjiang Longmay Mining Company, the country’s 17th largest producer with a 1.3% market share. According to some estimates, a total of 10,000 miners and their families took to the streets with banners stating, “Lu Hao tells lies while his eyes are wide open”.

The governor swiftly backtracked, blaming the company for feeding him inaccurate information. At an emergency meeting in Heilongjiang, he pledged to work with the coal firm to make sure it divests non-core assets so workers are paid and cashflow is restored.

China Economic Weekly has been examining the difficult restructuring at Longmay, which has reported ever-larger losses since 2012. Debt has quintupled in the space of seven years as the company struggles with depleted mines and inefficient production (it still has three times the number of miners per tonne of coal extracted, compared to the national average).

Last September, it announced plans to lay off about 40% of its workforce within three months. Instead, it reassigned 10% of its overstaffed workforce to farming, forestry and cleaning jobs.

As Lu Hao told NPC delegates, Longmay’s annual wage bill comes to Rmb10 billion ($1.54 billion). Alongside its 200,000-odd employees, it is also supporting nearly as many pensioners. However, Lu says the province only has financial resources of Rmb30 billion so it can no longer support the company on its own (Longmay is Heilongjiang’s biggest state-owned enterprise).

The central government has established a Rmb100 billion fund (half the size of Clinton’s proposed plan) to help unemployed miners. Specialists remain sceptical. Rating agency Fitch notes the government’s phase-out target for coal represents only one third of forecast excess capacity. It also believes implementation will be slow because local governments, which own most of the coal giants, fear the kind of social instability Shuangyashan so clearly highlighted.

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