Coal overcapacity as the top of Mount Tai

The ongoing decline in coal prices has brought the issue of overcapacity in China's coal industry into sharp focus. By the end of 2011, the country’s total coal production capacity had reached approximately 3.9 billion tons, with an additional 1.1 billion tons under construction. In 2012, coal inventories exceeded 300 million tons for the first time, peaking at 344 million tons. By 2013, domestic production capacity was expected to reach 4.63 billion tons, far surpassing a forecast 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 annual output. Meanwhile, coal demand is showing only slow recovery, and downstream sectors are struggling. The steel industry, already burdened by overproduction and widespread losses, continues to face challenges. By the end of May, steel inventory hit 18.19 million tons, while steel prices kept falling, deepening the sector’s financial troubles. With limited control over iron ore prices, steel mills have been forced to cut costs, which has further depressed coking coal and coke prices. At the same time, the influx of imported coal has worsened the pressure on domestic inventories. Since 2008, low-cost foreign coal has flooded the market, and China’s coal imports have grown by more than 30% annually since 2009. In the first quarter of this year alone, imports reached 80 million tons—a 30.1% increase from the previous year. Economic growth has also slowed, directly impacting coal demand. From January to March, domestic coal consumption rose just 1.5% year-on-year, down from the previous year’s rate. In key energy-intensive industries, coal use declined across the board, with building materials seeing little change compared to last year. This has led to a rare drop in both production and sales in the coal market. Electricity consumption, another major driver of coal demand, also showed weakness. In March, overall electricity use increased by only 2%, and the cumulative growth from January to March stood at 4.3%, the lowest in 46 months. Fixed asset investment in the coal mining sector has also declined sharply, with the first quarter’s investment dropping 12.6% year-on-year to 47.8 billion yuan—the first negative growth in years. By the end of 2012, 1,290 out of 7,790 coal companies were operating at a loss, with accumulated losses totaling 24 billion yuan. Accounts receivable grew by 28.6% compared to 2011, making collections increasingly difficult. In Shandong, one of China’s major coal-producing provinces, the situation is particularly grim. Profits dropped by 68% in the first four months of 2013, and over one-third of local mines were losing money. Several listed coal companies also reported steep declines in profits. Anyuan Coal saw a 68.79% drop, Yanzhou Coal fell 77.49%, and Panjiang shares plunged 76.9%. Even China Coal Energy reported a 37.8% drop in net profit. While China Shenhua performed relatively better, its net profit still fell by 1.3% year-on-year. Looking ahead, the outlook for the second half of the year remains uncertain. With GDP growth slowing to 7.7%, below expectations, industrial activity has weakened. As the economy transitions to a mid-to-low-speed phase, coal overcapacity is likely to persist. Thermal coal prices will remain under pressure, as power plant reserves stay high and demand is weak during the traditional off-season. Coking coal also faces downside risks due to continued steel overcapacity and high inventories. Meanwhile, imported coal remains competitive, with prices still lower than domestic alternatives. Given these factors, the coal market is expected to continue its downward trend. Domestic coal companies, including listed firms, will face significant operational challenges in the coming months. The combination of weak demand, oversupply, and strong import competition shows no signs of easing soon.