Why China’s coal freight cut is a double-edged sword

Mainland China’s coal demand fell 4.1 per cent last year

PUBLISHED : Sunday, 07 February, 2016, 10:01am
UPDATED : Sunday, 07 February, 2016, 10:01am

National railway operator China Railway Corporation’s decision to cut its coal freight rate from last Thursday will hurt railway operators but bring welcome relief to a coal mining sector suffering from widespread losses.

State-backed China Railway has slashed its freight rate by 1 fen for each tonne of coal moved for one kilometre, which is estimated to result in logistics cost savings totalling some 10 billion yuan a year, Xinhua reported on Wednesday.

The reduction could amount to 10 per cent, based on the year-earlier freight of 10 fen per tonne-kilometre published by China Railway.

China International Capital Corp’s analysts estimated in a note that the price cut would result in a 2 billion yuan net profit reduction for Shanghai-listed Daqin Railway this year.

The company, which operates the coal railway linking Datong, Shanxi province and the nation’s largest coal port Qinhuangdao, is also expected to suffer from a 6 per cent decline in coal throughput this year due to lower coal demand and traffic diversion from another coal railway connecting Inner Mongolia autonomous region and Hebei province, they said.

The analysts forecast Daqin’s net profit to decline 24 per cent to 10.81 billion yuan this year, and to fall another 10 per cent next year.

But the freight cut is good news for China’s hundreds of coal miners, of which over 90 per cent are making losses, according to China Coal Industry Association.

The benchmark price of power-station coal with a calorific value of 5.5 million calories per kilogram has fallen around 56 per cent since late 2011 to around 370 yuan a tonne this month.

The nation’s largest and most profitable coal miner, China Shenhua Energy, said late last month it expected to post a 54.9 per cent fall in net profit to 17.74 billion yuan, as its downstream coal railway, shipping and power generation operations helped cushion the impact of falling coal price and demand.

Rival China Coal Energy, which like Shenhua is both Hong Kong- and Shanghai-listed, said last month it expected to post a net loss of between 2.3 billion and 2.8 billion yuan for last year, compared to a profit of 766.7 million in 2014, citing weak coal prices and demand.

A Sealand Securities research report projected that China’s coal sector would start to see a net reduction in production capacity this year, with closure of some 150 million tonnes of capacity more than offsetting 100 million of newly constructed capacity.

It expected the capacity closure to double next year from this year, resulting in a shrinking of overcapacity to around 200 million tonnes in an industry with total capacity of 4.2 billion tonnes last year.

Mainland China’s coal demand fell 4.1 per cent last year to 3.95 billion tonnes, after declining 2.8 per cent in 2014, as the nation’s economic growth slowed and became less reliant on energy-intensive heavy industries.