China’s output cuts fuel demand for coal, trims inventories

Top firms set to post lower profit declines for the first six months of this year, say analysts

PUBLISHED : Sunday, 14 August, 2016, 2:25pm
UPDATED : Sunday, 14 August, 2016, 10:07pm

Though China’s embattled coal industry is enjoying a windfall of sorts on the back of rising demand and shrinking inventories, leading coal firms are still expected to post losses for the first six months of the year, analysts said.

According to a research report published by Bank of China (BOC) International last week, coal prices will continue to climb in China, the world’s largest producer and consumer of coal, this month. The report said coal prices have been bolstered by supply cuts, shrinking overcapacity and increased demand for thermal coal in summer months.

Evidence that prices are picking up is already visible on the ground with China Shenhua Energy, the world’s largest state-owned coal supplier, increasing its contract prices for August by 18 yuan (HK$21) per tonne to 435 yuan (HK$508) per tonne, according to China Coal Resource Net. According to analysts, the company is expected to make further increases subsequently as its contract price is 20 yuan lower than the spot price, or current market price, which allows room for further growth.

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“We may see contract prices surging in the low seasons of September and October and catching up with the spot prices,” BOC International analysts Maggie Sheng and Lawrence Lau said in the report. “Such moves will benefit Shenhua and the whole coal sector in the long run,” they said.

Spot prices of other categories have also seen an increase. Prices of Shanxi high grade thermal coal at the Qinhuangdao port rose by 50 yuan per tonne in July, while in Guangzhou, thermal coal jumped by 55 yuan per tonne to 500 yuan per tonne during July.

That is good news for China’s coal industry which has been facing a torrid time since 2012 as demand weakened due to the slowing economy, China increased its use of clean fuels and the Chinese government renewed efforts to reduce carbon emissions, according to a report from the Oxford Institute for Energy Studies. In recent years, the rapid production of coal has led to an oversupply in the market, causing miners to incur significant losses and prices to fall to six-year lows, a Wall Street Journal article said. The government responded to this by taking steps to curb overcapacity like lower output targets, regulations limiting working days for miners and curbs on construction of new plants. Unnecessary and unprofitable mines were forced to shutter operations, a Bloomberg report said.

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The measures yielded fruit with inventories of six major coal producers falling to the lowest in 32 months in late July, the BOC International report said. In Qinhuangdao, inventories dropped 20 per cent from July to August to 2.7 million tonnes, its lowest level in eleven years. But despite these historically low supply levels, coal miners this year are actually behind schedule to cut overcapacity, having only met 38 per cent of their targeted reduction of 250 million tonnes by the end of July, a National Development and Reform Commission (NDRC) statement on its website said.

Supply reductions and higher prices have helped soften profit declines for major coal companies this year. China Coal is expected to report a 13 per cent decrease in profits, or a net loss of 73 million yuan (HK$85.3 million), in the first half of the year by International Financial Accounting Standards (IFRS), a lower profit decline than in 2015. By Chinese Accounting Standards (CAS) — a standard measuring inventory of assets available to companies — China Coal will actually end up with a net profit of 350 to 520 million yuan in the first half, the BOC International report said.

Shenhua Energy is predicted to see profit fall by 27 per cent in the first half to 9.5 billion yuan under IFRS and 9.4 billion yuan under CAS from the same period a year ago, according to the report. Yanzhou Coal is likely to report profits of 166 million yuan under IFRS, up from its 51 million yuan loss in the first half of 2015. Its recovery has been helped by stringent cost control measures, Sheng and Lau said.

Shougang Fushan Resources Group is expected to incur a net loss in the first half of the year, as a result of lower raw coal output and an 18 per cent drop in the price of its No. 4 raw coking coal in Liulin.

The Chinese government has been wary about the coal market rebound, Sheng and Lau said.

“If coal prices surge too much too soon, it will be difficult to strictly implement the supply-side reform,” the analysts said, referring to China’s economic growth strategy of capital investment and decreased production barriers.

China prefers to have gradual recovery over rapid surges, they added.