New | China deals with runaway coal market ahead of expected cold winter

China’s drive to reduce overcapacity and streamline its coal industry has sent prices of the bulk commodity soaring. Efforts initially aimed at reversing a four-year collapse and help miners repay debts have pushed coal higher and faster than anyone anticipated.

The fuel burned in power stations has doubled, while the coal used in steel making has more than tripled. The boom has also turned mining companies from some of the worst performing stocks into the best.

China went big on the production cuts earlier this year, causing output from the world’s largest miner to drop 11 per cent in the first nine months. It also trimmed 150 million tonnes of overcapacity by the end of August -- more than Russia’s entire thermal coal exports last year -- and is targeting 500 million tonnes by the end of the decade. For the time being, the cuts appear to have stopped, with output in September up 5 per cent from its May low.

A look at China’s ports, mines and power plants show the impact of the aggressive policy this year. Inventories dropped for eight consecutive months through August to the lowest level since 2008. That left electricity generators in a precarious position as they stockpile coal ahead of winter, which is forecast to be the coldest in four years. Power generators and steelmakers have turned to the overseas market to top up supplies, boosting imports 15 per cent over the first ninth months.

China is now scrambling to reverse the rally, with regulators calling the surge “irrational” and meeting miners regularly to hash out ways to stabilise prices without backtracking on the original goal of permanently erasing the glut.