Fading Embers in China’s Coal Industry

Of all the indicators released about China’s 2014 economic performance, some of which are surprisingly positive, China’s coal mining industry stands out as one of the worst performing sectors of the year, with a decline in industrial profits of 46.2 percent. The coal mining industry faced falling prices and excess capacity in 2014, after a four-year run, from 2009 to 2012, of above-average prices. The industry’s malaise became highly visible in the media last year as several shadow banking loans to coal mining companies faced potential default in 2014. A large part of the drop-off in coal industry profits can be attributed to increased reliance on cleaner sources of energy and decreased dependence on coal around the world and even in China itself.

For one, improved environmental standards around the world have reduced orders for this heavily polluting resource, and China has forced smaller mines to close or be purchased by state-owned companies. About 1,000 small coal mining companies were shut down in 2014. In the past four years, 5,920 coal mines have been closed. Most Chinese mining companies, about 70 percent, incurred losses in the first 11 months of 2014, as national governments have adopted climate change policies that attempt to transfer the reliance on polluting fuels to renewable and cleaner energy.

Second, China is also very slowly decreasing its demand for coal as part of its five-year energy strategy for the 2016-2020 period, from 64.2 percent of total energy consumption to below 62 percent by 2020. Use of some highly polluting types of coal have been banned. As the world’s largest coal consumer, China’s declining demand for this natural resource bodes well for the environment and for the health of its population, as coal plant emissions alone result in hundreds of thousands of premature deaths due to particulate and heavy metal pollution. Coal miners themselves frequently suffer from pneumonoconiosis, or black lung disease, due to inhalation of coal matter.

The transition to a diminished reliance on coal is difficult, however. Chinese regulators have attempted to maintain coal contract prices in order to maintain economic stability, but even so, coal prices declined 20 percent in 2014. Stockpiles of the fuel at coal mining companies increased 2.6 percent year on year, to 87 million tons, while stockpiles of coal at power plants rose by 17 percent. Excess inventories and overcapacity will likely maintain the pinch in the coal sector over the next year. To combat this, Shanxi province in northern China, one of the biggest coal producing regions in the nation, stated that it would not approve new mining projects until 2020. This represents a dramatic move toward increasing efficiency in coal markets.

How the ongoing decline in coal demand, and its impact on China’s primary sector, will play out is yet to seen. On the upside, provinces are falling into line with the national target on coal reduction. Already, twelve provinces have committed to reducing coal use, and the intensive coal-using regions of the Yangtze and Pearl River Delta have been asked by the central government to limit their use as well. While coal production and consumption in China have more than doubled since 2000, these industrial gains will have to be dampened in order to account for the now-ubiquitously dubbed “new normal” in the energy regime. Short-term pain in this dirty sector is virtually inevitable.