China eases coal mine working day curbs as supply tightens

21 November 2016

China’s top planning body has relaxed working day restrictions on its coal mines after reduced output boosted prices, frustrating central planners’ desire to control both price and supply of the nation’s most important energy source.

China’s National Development and Reform Commission said on Thursday that all mines could produce for 330 days each year, after last week extending a production band of 276-330 days through the end of March. Mines had been regulated on how many days they could operate, within the band.

The relaxation came after output statistics for October showed Chinese coal production had dropped 11 per cent in the first 10 months of 2016 versus the same period the year before. On a daily basis, output in October was down 1.5 per cent from September.

The relaxation is likely to hit “frothy” thermal coal prices, Fitch Ratings said in a note on Thursday: “The strong pricing rebound since early 2016 is unlikely to be sustained as the Chinese government relaxes its working-day curtailment policies to manage prices.”

A prolonged slump in coal prices has allowed the Chinese state to re-exert control over a sector that was known for its private capital and ungovernable private mines when the Chinese economy was booming.

Many indebted private mines have shut or been absorbed by large state-owned mining companies, leaving Beijing wrestling with a re-nationalised industry in an economy that is more complex than during the heyday of state planning.

Output restrictions on thermal coal had been intended to bolster prices and allow China’s chronically bloated state coal miners to repay loans. But planners failed to account for the degree to which private miners had also dropped out of the market, and were caught off-guard when investors profited by the squeeze to drive up futures prices of coking coal, used in steelmaking. Coal futures are up roughly 200 per cent year-on-year, even after a sell-off this week as futures exchanges imposed measures to deter speculation.

As recently as November 11 the NDRC had maintained it would stick with the band of working day output restrictions. “The increasing price of coal will not dampen the determination to cut coal capacity,” its vice-secretary said at the time.

The NRDC has also strong-armed state-owned miners to sign supply agreements with state-owned power plants at below-market prices in an attempt to persuade traders that prices have risen too much.

Power plant supply agreements that were set too low was one of the factors that deterred state coal mines from expanding two decades ago, opening the door for private entrepreneurs to capitalise on strong spot demand for coal as economic growth took off.

Source – FT