Coal overcapacity as the top of Mount Tai
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The decline in coal prices has brought to light a growing issue of overcapacity within the entire coal industry. By the end of 2011, China’s coal production capacity had reached approximately 3.9 billion tons, with an additional 1.1 billion tons under construction. In 2012, coal inventories surpassed 300 million tons for the first time, reaching 344 million tons. By 2013, domestic coal production capacity was expected to rise to 4.63 billion tons, far exceeding the projected demand of 4.12 billion tons. If fully utilized, this would result in about 500 million tons of surplus—nearly half of Inner Mongolia’s total coal output.
At the same time, coal demand is showing only a slow recovery, while downstream industries are also slowing down. The steel sector, in particular, is facing severe overcapacity and widespread losses. By the end of May, steel inventory had reached 18.19 million tons, and steel prices continued to fall, leading to significant financial strain on the industry.
With limited control over iron ore prices, steel mills are struggling to break even, which has further depressed the price of coking coal and coke. Meanwhile, the influx of imported coal has worsened the pressure on domestic coal inventories. Since 2008, an increasing amount of low-cost foreign coal has entered the Chinese market, with annual imports rising by over 30% since 2009. In the first quarter of this year alone, China imported 80 million tons of coal, a 30.1% increase from the previous year, and net imports rose by 33.7%.
Domestic economic growth slowed significantly in the first quarter, directly impacting coal demand. According to the China Coal Industry Association, coal consumption between January and March this year totaled about 900 million tons, representing just a 1.5% year-on-year increase. This marked a noticeable slowdown compared to previous years.
In key energy-intensive sectors, coal consumption growth declined across the board. The building materials sector saw little change compared to the same period last year. The coal market experienced a rare drop in both production and sales.
Electricity consumption in March grew by only 2%, the second-lowest in 46 months since June 2009. The cumulative growth from January to March stood at 4.3%, lower than the previous two months. This weak performance has raised concerns about future coal demand.
The lack of downstream demand has also led to a decline in fixed asset investment in the coal mining sector. In the first quarter of this year, investment fell by 12.6% year-on-year to 47.8 billion yuan, marking the first time in many years that the sector experienced negative growth.
As of the end of 2012, 1,290 out of 7,790 coal enterprises were operating at a loss, with total accumulated losses reaching 24 billion yuan. Accounts receivable increased by 28.6% compared to 2011, making it harder for companies to collect payments.
Shandong’s coal industry is particularly affected, with profits dropping by 68% in the first four months of 2013. Many local mines reported losses, with more than one-third of them operating at a deficit. Some listed coal companies also saw sharp declines in profits. Anyuan Coal lost 68.79%, Yanzhou Coal dropped 77.49%, and Panjiang shares fell 76.9%. Although China Shenhua performed relatively better, its net profit still declined by 1.3% year-on-year.
Looking ahead, the second half of the year does not appear promising. The GDP growth rate for the first quarter was 7.7%, below the market expectation of 8%, mainly due to weaker industrial activity in March. As China transitions into a mid-to-low-speed growth phase, the problem of coal overcapacity is likely to persist. Electricity demand growth is expected to remain sluggish, and with rising hydropower output, thermal power plants may face a prolonged low season. The steel industry remains burdened by high inventories and falling prices, making it difficult to recover in the short term.
Thermal coal markets will continue to face downward pressure. The China Electricity Council predicts a modest 6.5% increase in overall power consumption this year, similar to the previous year. With April to June being a traditional off-season, and power plant reserves remaining high, destocking will be slow, keeping thermal coal prices under pressure.
Coking coal also faces risks. Steel production capacity is still excessive, and the industry continues to suffer losses. Crude steel output in the first quarter averaged 63.24 million tons per month, far exceeding expectations. This has led to high steel inventories, with national steel stockpiles reaching 18.197 million tons by the end of May.
Imported coal is still a strong factor in the market. Despite a decline in domestic coal prices, imported coal remains cheaper. For example, 6300 kcal/kg thermal coal from Australia’s Newcastle Port costs around 633 yuan per ton, less than 0.1 yuan per kcal. This makes it more competitive than domestic coal. With strong import orders in April and May, the pressure on domestic coal producers is unlikely to ease soon.
Overall, the coal market remains in a relaxed environment, with no major changes expected in the near future. With limited demand growth and continued import competition, the market is unlikely to see a significant turnaround. Domestic coal companies, including listed firms, will continue to face operational challenges in the coming months.