China coal-price fall risks wider crisis
By Michael Lelyveld
A prolonged plunge in China's coal prices has created risks for the economy despite recent signs of improving growth.
Average prices at the country's main Qinhuangdao coal port have fallen 10.7% since the start of the year, the official Xinhua news agency said. Prices had already dropped over 20% last year, according to the Bohai Rim Steam Coal Price Index, cited by state media reports.
The slide from 800 yuan (US$130.62) per ton at the start of 2012 to 565 yuan (US$92.24) this month has dragged prices for China's main fuel to a five-year low. The decline may signal greater
economic weakness than the official 7.5% growth rate in the second quarter, recorded by the National Bureau of Statistics (NBS).
The price trend has also continued well into the third quarter, despite an NBS report showing stronger industrial output growth of 9.7% in July.
The deepening price drop since June may add to doubts about the accuracy of the official economic figures.
"We see weak demand from industrial users in the first half-year, especially industrial sectors," said Helen Lau, a UOB-Kay Hian analyst in Hong Kong, according to Bloomberg News. "As the economy further weakens, we expect coal prices could go as [far] down as 550 yuan a ton for the second half-year."
In the first seven months, coal production fell 3.5% to 2.13 billion tons, the China National Coal Association (CNCA) reported Monday, according to Xinhua. Coal sales fell 3.9% during the period to 2.07 billion tons, the CNCA said.
While economic weakness and oversupply may be blamed, cheaper imports are helping to drive prices down.
"A lot of coal is available at less than 470 yuan per ton," said a Tianjin-based trader, quoted by Platts energy news service.
Imports climbed 14.1% to 187 million tons in the first seven months, the CNCA said.
The implosion in the once-surging industry has produced a wave of losses and spreading ripple effects. Twenty-six large coal companies have lost a combined 4.66 billion yuan (US$760 million) in six months, according to the China Coal Transport and Distribution Association (CCTD), but that paled in comparison to their customers' debts.
The total owed to 80 large coal firms in the first five months jumped 22% from a year earlier to 320.6 billion yuan (US$52.3 billion), the CCTD said.
Beneath the piles of coal and unpaid bills lie larger economic problems that are only starting to emerge. On August 1, Caixin Online reported on a growing crisis of debt defaults and disappearances in the coal-rich Shenmu county of northwestern Shaanxi province.
Plunging coal prices have already burst the county's economic bubble and "triggered social unrest", Caixin said.
The trouble developed after high coal prices fueled speculation in mining operations, leading to a boom in luxury lifestyles and unregulated loans. But with the bust in prices that followed, many debtors have fled, leaving bankruptcies and unfinished buildings behind. Caixin quoted one pawnshop lender as saying that "more than 30 billion yuan simply evaporated" in the collapse.
A Xinhua report said the Shenmu coal bust has been mirrored elsewhere with untold damage to underground banks and investors. In Ordos city of Inner Mongolia Autonomous Region, "a credit crisis has slashed housing prices by more than half, leaving many newly-built residential communities unoccupied and turning parts of Ordos into ghost towns," Xinhua said.
The way forward
Falling coal prices may be an indicator of the true state of the economy, but the implications are unclear, since much of the lending was already off the books.
"For me, the interesting question is what happens next," said Philip Andrews-Speed, a China energy expert at the National University of Singapore's Energy Studies Institute.
China's new leaders have opted for a policy that stresses more sustainable growth and less economic stimulus to prop up the heavy industries that burn most of China's coal.
At the same time, the government is promoting urbanization as a solution to China's growing wealth gap. Perhaps incidentally, the policy may support some of the same energy-intensive industries, including steel, aluminum and cement.
"In the meantime, how will the government deal with the loss-making steel and coal companies?" Andrews-Speed asked. "Will it seize the opportunity and let the least efficient go bankrupt or will it support them until demand for their output picks up?"
On July 25, the Ministry of Industry and Information Technology ordered some 1,400 companies in 19 industries to cut outdated production and overcapacity by the end of the year.
If China's coal prices continue to drop, the questions will be whether the government has gone far enough and whether its orders will be observed.