2013 has been a painful year for China's coal industry. According to a report from the China Coal Transport and Distribution Association, as many as 26 large-scale coal enterprises have seen profit losses totaling nearly 5 billion yuan (roughly $800 million), while 16 provinces reported declines in output. No corner of the industry has been spared the effects of the country's ongoing economic slowdown, which has sent domestic coal prices tumbling anywhere from 45 to 90 yuan per ton since 2012, but China's smaller coal operators have been the hardest hit.
Indeed, the coal association's report reflects the mounting pressures faced by small-scale coal producers in a market marred by lagging demand, falling coal prices at home and abroad, and increasingly restricted access to credit for all but the most well-connected state-owned enterprises. Yet this development could help Beijing, which has long tried to consolidate China's disparate coal producers. For Beijing, industrial consolidation serves a variety of deeper political imperatives. It rationalizes and stabilizes national coal output; it enhances economic interdependencies between regions; and it strengthens the central government's position vis-a-vis local governments in traditional coal mining regions.
Market Forces
From its inception through the early years of Mao Zedong's rule, China's coal industry was concentrated in just a few provinces, where a handful of major state-owned mines accounted for most of the country's coal output. But after Deng Xiaoping took power in 1978, it became clear that centering the coal industry primarily on the state would not sufficiently meet the demands of China's ballooning "Reform and Opening" economy.
This realization gave rise to thousands of small-scale coal operations. Production increased accordingly, but it did so at the expense of central coordination and oversight. Thus, after 1985, small-scale miners with ties to the government replaced the larger conglomerates as the dominant coal producers in the country. In the late 1990s, China's leaders, concerned that a fragmented coal industry would empower local governments, began to rein in small-scale miners under the aegis of the state.
But Beijing's consolidation efforts have largely been unsuccessful. Despite the rise of integrated coal conglomerates such as the Shenhua Group, through which Beijing hopes to concentrate its own indirect control of domestic coal production and distribution, China's coal industry remained highly fragmented throughout the 2000s. As late as 2009, small-scale "township and village" mines accounted for almost 30 percent of Chinese national output — nearly equivalent to total annual production by the world's second-largest supplier, the United States.
As long as coal demand and prices were high, as they were for most of the 2000s, efforts to weed out inefficiencies and redundancies through government-mandated consolidation went largely unheeded. Local governments had a strong incentive to keep small-scale local mines operating — they generated revenue and kept employment high. Central government crackdowns on legal and illegal township and village mines and their illegal counterparts often reproduced and aggravated the problems they tried to solve, leading to even more illegal mines with even worse working conditions and generating more waste and overcapacity.
Now, with China's economy entering a period of chronically slower growth (and, by extension, slower growth in demand for the resources and raw materials that power its industrial sector), the central government's push to consolidate key industries appears to be gaining new traction. While falling prices have forced virtually all coal producers to cut back on production this year, by far the steepest declines in output have come from China's smaller, privately owned mines. Between January and May, smaller private mines' output fell 13.9 percent from the same period in 2012, compared to a modest 1.1 percent growth in output from large state-owned coal enterprises.
Several factors could have contributed to falling output from small-scale producers earlier this year. These factors include long-term issues, such as steadily depleting coal reserves in traditional mining provinces like Henan and Shandong, where township and village mines are most prevalent; ongoing central and provincial government crackdowns on non-state and illegal mines; and recent efforts by Beijing to curb the flow of informal, or "shadow," credit to riskier private enterprises. But underlying these is the simpler fact that market forces, which for much of the last decade militated against Beijing's consolidation efforts by sustaining local markets for profit-driven private producers, are making it harder than ever for miners without government life support to survive.
Temporary Disruptions
Declining coal demand and prices will continue to aid Beijing's industrial consolidation drive by eliminating increasingly unprofitable private coal enterprises and forcing those that survive to amalgamate or be subsumed under state-controlled entities. But consolidation is a long-term process. Even if China's top producers were to rapidly increase output in the second half of the year to compensate for the private sector's shortfalls, their contribution to national output would not likely exceed 45 percent (at the end of 2012, the top 10 state-owned coal enterprises accounted for 36 percent of total Chinese production). In the meantime, continued economic slowdown and falling coal prices create ample room for even larger declines in private mines' output and, in turn, temporary but sharp domestic supply disruptions.
In the first half of 2013, Chinese coal consumption growth slowed; it grew by only 1.8 percent. Even if consumption growth slows further throughout 2013-2014, China would remain by far the world's largest coal consumer. And as seen after 2009, when China suddenly transformed from a net exporter of coal to the world's largest coal importer, any fluctuation in China's domestic supply and demand balance can have enormous repercussions for international coal markets.
