Rising costs, weak demand, excess capacity harm local industry

One of China's leading commodities information portals has issued a stark warning on the state of the country's coal industry.

Sublime China Information Co Ltd, which runs the commodities website, www.sci99.com, says the industry continues to suffer from dramatic falls in prices and weak demand, caused by domestic overcapacity and growing imports.

Liu Dongna, an analyst at Sublime, said that since last year the industry's profits have been "seriously affected" by China's economic slowdown, excessive production capacity and increasing new energy applications.

As coal prices face further drops this summer, partly because hydropower generation starts to increase in June and July, Liu added: "There is no clear sign that the domestic coal industry can pick up."

She added: "As the profits of coal companies continue to fall, it would be a wise choice to transform their development mode."

And she warned that if the gloomy situation continues in the second half of the year, some medium-scale coal mines will go bankrupt.

The Bohai-Rim Steam Coal Price Index, China's major coal price benchmark, fell from 853 yuan ($138) a metric ton in November 2011, the highest level in recent years, to 613 yuan a ton in April this year, a drop of 28 percent.

Meanwhile, the average price for 5,500 Kcal to 6,000 Kcal thermal coal has dropped from the 692 yuan a ton in November 2011 to 524 yuan a ton earlier this month.

The price fell 4.4 percent during the first five months from 548 yuan at the beginning of the year, according to data from Sublime.

At a recent coal industry conference, Wang Xianzheng, head of the China National Coal Association, acknowledged that the overcapacity in the industry was "becoming serious, a big challenge", adding the development structure of the coal sector needs to be improved urgently.

As opposed to over-demand and short-supply in 2009 and 2010, China's coal inventory reached more than 344 million tons in 2012, and the figure is expected to continue growing this year. Many leading coal companies have already reported dramatic falls in profits during the first quarter of the year.

According to Wind Information Co, the financial research provider, total profits of China's listed coal companies on the A-share market dropped 27 percent year-on-year to 18.3 billion yuan, and industry insiders expect an even worse medium-term performance.

Of the nine listed coal companies that have pre-announced their medium-term earnings, four warned of profit falls and two expected losses for the first half.

Yankuang Group Co Ltd, China's fourth-largest coal mining company, reported a loss of 562 million yuan for the first quarter on total revenue of 19.49 billion yuan, a 7.83 percent drop year-on-year.

The company, which is majority-owned by Yankuang Group, one of the country's largest coal mining organizations, announced on Monday it had signed contracts to supply 7.54 million tons of thermal coal in Shandong province, 180,000 tons, or 2.33 percent, less than last year at this time.

It said its net profit had dropped 35.4 percent in the past year to about 5.58 billion yuan, which still made it "the most profitable company" in Shandong. But it said it was facing a loss for the year.

Yankuang Group is working to reduce costs by laying off staff and cutting pay, according to report by the 21st Century Business Herald on Tuesday.

All its senior managers are facing a 50 percent pay-cut, the company's first pay-cut since 2009, when it cut senior managers' pay in half to survive a weak market and operational difficulties.