HONG KONG: Yanzhou Coal Mining Co, a unit of the country's fourth-biggest producer of the fuel, expects profit in the January-to-September period to fall more than 55 percent from a year earlier on lower prices and missed production quota.

Both sides of the supply-demand equation have played a role in the profit plunge, as some of the company's mines and petrochemical plants in North China and Australia may miss annual production goals because of the government's safety checks on mining operations and because there has been "weak demand for chemicals," Chief Financial Officer Wu Yuxiang said in a teleconference call yesterday.

Although profits reached 6.6 billion yuan ($966 million) in the first nine months of 2008, Yanzhou Coal reported last week first-half net income fell 48 percent because of the economic slowdown on the mainland this year.

In addition to declining demand, the bottom line has been hurt by slipping growth in demand, relative to increases in supply. Growth in the country's coal supply will "generally" exceed increases in demand, according to Wu, who added that nationwide inventories rose 1.4 percent to 191 million metric tons at the end of June compared with January.

As for the H2 outlook, Wu said, "China's domestic coal prices are expected to stabilize in the second half in general," adding that, "Prices of certain types of the fuel may show small fluctuations in some regions for a certain period of time."

The impact of the double-whammy of declining output and declining prices is suggested in recently completed deals: Yanzhou Coal has so far signed 10.27 million tons in coal-supply contracts with domestic buyers this year, representing a 31 percent decline in volume and an 11 percent drop in prices, Wu said. The company has contracted to export 364,000 tons in 2009 at prices 26 percent lower than last year, he said.

Despite the unwelcome income news, shares of Yanzhou Coal have more than doubled in Hong Kong trading this year, compared with a 43 percent gain in the benchmark Hang Seng Index. The stock rose 2.4 percent to HK$12.02 at the midday break yesterday.

A pattern of production cuts is unlikely to be reversed in the near future. Shandong-based Yanzhou Coal plans to produce 35.05 million tons of coal this year, or 6.7 percent less than last year's actual output, according to Wu. First-half production fell 4.4 percent to 17.28 million tons, the company said on August 21.

Falling domestic demand has caused coal at Qinhuangdao port, a mainland benchmark, to drop 44 percent to this year's low of 558 yuan a metric ton from a record last July.

Looking forward and in light of lower global commodities prices, Yanzhou Coal has joined other mainland Chinese companies in acquiring overseas assets to boost earnings and meet future demand.

Yanzhou Coal is confident of getting the approval of the Chinese and Australian governments for its proposed A$3.5 billion ($3 billion) takeover of Felix Resources Ltd, Wu said, without providing further details.

Bloomberg News

(HK Edition 08/25/2009 page4)