February 23, 2017 2:00 am JST

China moving to renew coal mining curbs

Industry itself seeks limits to avoid looming price collapse

SHUNSUKE TABETA, Nikkei staff writer

Coal mine output has been rising since autumn in China, as at this producer in Yulin, Shaanxi Province.

BEIJING -- The Chinese government may reinstate curbs on coal mining lifted last fall, with producers calling for new limits on output amid fears of a coming plunge in prices.

Executives from 19 leading coal companies, among them Shenhua Group, gathered Tuesday for talks at which they agreed to work to prevent a sharp price reversal in thermal coal, which could come in March or April, after the winter heating season ends.

Behind the scenes, the coal industry is discussing with the government a proposal to reinstate the operating limit on mines, according to people familiar with the matter. That order, waived last autumn, drew the line at no more than 276 days a year.

Thermal coal prices turned upward after the Chinese government early last year set a goal of cutting 250 million tons of annual production capacity and imposed the operating limit. Bigger-than-expected capacity reductions of 290 million tons tightened supply more than the market had bargained for, sending the price to a peak of more than 600 yuan ($87) per ton, 60% higher than at the start of 2016.

In response, the Chinese government lifted the operating curbs and told coal producers to raise output. The tightness in supply has since eased, and coal has been fetching around 590 yuan per ton recently.

But going into Tuesday's talks, "there was a risk of a crash" looming after winter, according to one analyst. This year's capacity cuts are expected to total only 50 million tons -- less than a fifth of the previous year's. Should mines continue operating without limit, they could fuel a coal glut.

Coal companies want the government to reinstate the cap for their own good. Leading producers' profits tripled last year, but this owed mainly to the unsustainable rise in prices. Many of the companies are state-owned. Their hope for earnings improvement matches that of the government, which also seeks price stability, fearing the social unrest that could accompany rampant inflation.

Meanwhile, the National Development and Reform Commission, China's economic planning body, and other authorities have moved to tamp down surging steel prices. Notices have been sent to steelmakers, construction companies and manufacturers of autos and machinery, urging them to enter into long-term steel supply contracts at below-market prices.

China cut 65 million tons of steel production capacity in 2016, 40% more than it had set out to do at the start of the year. With metallurgical coal getting dearer, benchmark steel products are fetching prices 80-90% higher than a year ago. Speculative trading appears to have played a part in this run-up.

These efforts to stabilize prices bear only on the domestic market. But given China's weight in international supply and demand for commodities, the world is watching.

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