China has announced plans to close more than 1,000 coal mines in 2016, cutting production by 60 million tonnes. The move is part of a larger mandate to eliminate as much as 500 million tonnes of surplus production over the next five years, the government says.
When it comes to coal, China is king: it is the world's largest producer and also its largest consumer. Last year, the country's 10,760 mines produced 3.7 million tonnes of coal. Yet, it's estimated that over half (2 million tonnes) that capacity does not get used, every year. According to a Reuters report, demand has waned due to the combination of a slowing economy and government policy to curb pollution by moving away from fossil fuels.
In addition to the air pollution from burning coal that plagues Chinese cities and exacts huge costs on society, the country's coal mining over-production is a real problem. Last year the country's supply surplus drove domestic prices down by a third. Prices have dropped for five straight years thanks to a glutted market. Recognizing one of its most important economic sectors is in trouble, China hopes to stimulate the industry through consolidation. The government has plans to eventually shut down all mines that produce less than 90,000 tonnes per year. Under this policy 5,600 mines will be shuttered.
Coal is Struggling, MightilyChina and the United States produce roughly 60% of the world's coal. The health of their industries, therefore, is likely a good baseline indicator for the sector as a whole.
What's the current outlook for these high-producing nations? In a word, bleak.
Take, for example, China's largest coal producers. Last week, 28 out of the country's 33 publicly traded coal companies released their 2015 results. According to Fitch, a credit ratings agency, this group of companies collectively reported a net loss of more than 4 billion yuan last year (USD $613 million). 20 of the companies were loss-making, while the other eight had earning declines of 57-93%. Ten companies were in the red by more than 10 billion yuan ($USD 1.5 billion). What's more, in 2014, this same group realized a profit of 37 billion yuan (USD $5.6 billion).
Fitch analysts don't expect a “price recovery” for publicly traded coal companies to happen this year. Demand for coal is weak and they don't believe the measures the government has taken will address over-supply: “Fitch believes industry consolidation will take longer, and more effort, than the central government has expected.”
Things aren't much different in the U.S. where the coal industry has tanked spectacularly over the past five years. A recent report by the Rhodium Group captured just how precipitous the decline has been:
“The US coal mining sector is in free-fall. The four largest US miners by output (Peabody Energy, Arch Coal, Cloud Peak Energy, and Alpha Natural Resources) which account for nearly half of US production, were worth a combined $34 billion at their peak in 2011. Today they are worth $150 million.”
Last week, Peabody, America's largest coal company, shared its 2015 performance review. The report was ugly. This shouldn't be a surprise given the company's stock dropped from $116 to just over $7 within the year. Even more, analysts slammed the company's recovery plan. As of this writing, Peabody shares are trading at $2.11.
Over-production, changing economic drivers, new energy policy and regulations: there are multiple influences wreaking havoc on coal. As China and the U.S. strikingly highlight, the impact on the industry has been singular in a nature: severe knee-buckling.
Image credit: Air pollution in Beijing, China in 2015, via Shutterstock.