As a major coal-energy country, China’s coal production capacity and prices have long been shaped by both market forces and policy interventions. Against the backdrop of severe overcapacity in the domestic coal industry during the 2014/15 period, the State Council issued in February 2016 the “Opinions of the State Council on Resolving Excess Capacity and Achieving Restructuring and Recovery in the Coal Industry,” aimed at addressing the issue of overcapacity. The document stated that starting from 2016, over a period of three to five years, the coal industry would further phase out around 500 million tons of capacity and reduce and restructure another roughly 500 million tons of capacity. A key focus of the document is: 1. Strictly controlling the addition of new capacity.

Starting from 2016, within a three-year period, the approval of new coal mine projects, technical renovation projects aimed at increasing production capacity, and projects seeking to expand existing capacity will, in principle, be suspended. For any genuinely necessary new coal mine projects, a corresponding reduction in output must be implemented as a replacement measure. Second, we will accelerate the phasing out of outdated and capacity that does not comply with industrial policies. Third, we will strictly control overcapacity production and guide enterprises toward reduced-production operations. Beginning in 2016, coal production capacity will be recalculated based on an annual working schedule of no more than 276 working days. The 276-working-day rule effectively lowers capacity utilization rates, equivalent to a reduction of roughly 16% in overall capacity, thus playing a decisive role in curbing output levels.

Since 2016, China’s monthly production of thermal coal has consistently posted year-on-year negative growth. In June, the largest year-on-year decline reached 16.6%. In the first three quarters of the year, the nation’s cumulative raw coal production totaled 2.456 billion tons, a decrease of 10.5% year on year, demonstrating a significant contraction in output. In 2016, cumulative raw coal production fell by 517 million tons compared to the same period last year, representing a year-on-year decline of 15%.

Raw coal production and year-on-year growth rate

Source: Compiled from publicly available information

Thermal coal production and year-on-year growth rate

Source: Compiled from publicly available information

From the perspective of the number of coal enterprises and the size of the workforce, the industry also experienced a round of capacity elimination in 2016. In 2016, the number of enterprises in the coal mining and washing industries was 5,592, down 13% from 2015; the number of employees totaled 3.97 million, a decrease of 10% compared to 2015.

Number of enterprises in the coal mining and washing industry

Source: Compiled from publicly available information

Number of employees in the coal mining and washing industry

Source: Compiled from publicly available information

As capacity reduction efforts progressed, coal prices experienced a rise that accelerated from a slow pace to a rapid one. In January 2016, the delivered price of 5,500 kcal动力煤 from Shanxi to Qinhuangdao was only 370 yuan per ton—a low point not seen since the financial crisis of 2008. In the first half of 2016, the price saw a slight increase, climbing to 400 yuan per ton by early July. Starting from July 2016, the price began to rise rapidly, surging by 60% within just four months to reach 650 yuan per ton. From the beginning of 2017 until now, the delivered price of动力煤 to Qinhuangdao has remained roughly stable between 620 and 630 yuan per ton.

2016 Qinhuangdao thermal coal delivered-to-port price

Source: Compiled from publicly available information

2016 prices for prime coking coal and metallurgical coal

Source: Compiled from publicly available information

According to data from the China National Coal Transportation and Marketing Association, in 2016, the main business revenue of coal enterprises above a certain scale totaled 2,317.85 billion yuan, down 7% year-on-year, but the decline narrowed by 10 percentage points compared to 2015. The entire industry achieved profits of 23.3 billion yuan, up 15% year-on-year, and showed a month-on-month upward trend throughout 2016. Among the 90 large coal enterprises directly reported by the China National Coal Transportation and Marketing Association, profits for the first nine months reached 8.579 billion yuan, compared to a loss of 400 million yuan during the same period last year. With the exception of some older mining areas that continued to report losses, most other enterprises turned profitable.

Main business revenue of the coal mining and washing industry (in 100 million yuan)

Source: Compiled from publicly available information

Cumulative Operating Profit (in 100 million yuan) for the Coal Mining and Coal Washing Industry

Source: Compiled from publicly available information

Inventory in the Coal Mining and Coal Washing Industry (in 100 million yuan)

Source: Compiled from publicly available information

Gross Profit Margin (%) for the Coal Mining and Coal Washing Industry

Source: Compiled from publicly available information

Fixed-asset investment in China’s coal mining and coal preparation industries typically consists of three main components: construction and installation works, procurement of equipment and tools, and other expenses. The fixed-asset investment of coal enterprises covers a wide range of areas and has a complex structure; investment in coal machinery and equipment may represent only a small part of the total. Historical experience indicates that the share of coal machinery and equipment investment in total fixed-asset investment generally remains within a stable range. On average, coal machinery and equipment account for between 30% and 35% of fixed-asset investment. However, over the past two years, due to the industry’s rapid development prior to 2012, demand for coal machinery had already been largely satisfied ahead of time, resulting in lower demand for equipment purchases and a downward trend in recent years—by 2015, the share had fallen to 29.8%. By contrast, the share of construction and installation costs has shown an upward trend, reaching 62.38% in 2015. After 2016, the state, in principle, stopped approving new coal mines, which will lead to a reduction in construction and installation demand for newly built mines and a corresponding decline in the share of such investments. Meanwhile, as demand for equipment upgrades gradually materializes starting in 2017, the share of equipment purchase investments is expected to increase significantly in the coming years, potentially accounting for around 35% of total future fixed-asset investments.

Completion of Fixed Investment in the Coal Mining and Coal Washing Industry (in 100 million yuan)

Source: Compiled from publicly available information