China Shenhua Energy

China Shenhua Energy asks its coal mining units to cut production costs

Nation's largest coal producer is seeking a 5pc drop in production outlay per tonne as part of a series of measures to deal with weak demand

PUBLISHED : Tuesday, 16 April, 2013, 3:24pm
UPDATED : Wednesday, 17 April, 2013, 1:45am

China Shenhua Energy has asked its coal mining units to cut their production costs for each tonne of coal by 5 per cent, in the face of tough market conditions.

The listed unit of the nation's largest coal producer, Shenhua Group, has adopted a series of measures to reduce costs amid weak demand, said vice-president Zhai Guiwu.

"In the face of this market condition … we have asked our operating units to cut production costs by 5 per cent from their budget," he said on the sidelines of the Coaltrans conference in Beijing.

He would not specify the original cost target, saying it varied widely between different projects. But he said as mines were dug deeper, operating costs increased. Government levies were also a burden, he said.

China Shenhua chairman Zhang Xiwu said late last month that it was aiming to contain this year's unit production costs to within 10 per cent after a 9.7 per cent rise last year.

Sales this year are expected to be flat from last year's 464.6 million tonnes.

Smaller rival Yanzhou Coal Mining, the listed unit of the nation's fourth-largest coal miner Yankuang Group, is expecting flatter production costs this year at its main production base in Shandong. Its total sales target is 89.9 million tones, 4.6 per cent lower than last year.

Qu Jianwu, director of Taiyuan Coal Trading Centre, said among 90 of the nation's largest coal miners, 22.3 per cent saw a lower profit last year while another 21.1 per cent posted losses.

Weaker industrial output and ample hydro power supply meant power station coal consumption grew only 0.6 per cent last year to 2.9 billion tones, while consumption of coal used to smelt steel rose 1.7 per cent to 550 million tones, he said.

In the first two months of 2013, coal-fired power output grew just 1 per cent year on year, against 23.9 per cent growth in hydro power, according to the National Bureau of Statistics.

Luther Lu Gang, chief market analyst at Fenwei Energy Consulting, said a large number of hydro power plants initiated during the 2009 global financial crisis were due to come on stream next year and in 2015, and their cost competitiveness would dampen demand for coal-fired power.

Neil Dhar, co-head of hard commodities at trading and logistics firm Noble Group, said the coal market was weak globally. He expected total global coal mining revenue to be flat between 2011 and 2016, with lower prices offset by higher sales volumes. Between 2016 and 2021, he expected revenues to rise, but they would be entirely driven by volume growth with no price increase.

"Historically, product costs have been rising some 10 per cent annually. This can't continue," he said. "Increasing competition will lead to lower profit margins … miners and traders must focus on supply chain management.

"They need to have scale and a diversified product footprint," he said.