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Is there a silver lining in black coal?

By Song Yingge | July 4, 2016, Monday | Print Edition

AFTER graduating from China University of Mining and Technology two years ago, Feng Che went to work as an engineer at a state-owned coal plant.

Month by month, he sees jobs declining in an industry that has become a pariah in the clean energy dialogue and suffers from fewer mines and lower profits.

“We just can’t see a promising future,” Feng lamented. “It’s especially hard for miners who have no other skills. What else can they do?”

China’s coal mining industry has indeed been on the skids since global prices began slumping in 2014, but lately there have been small glimmers of hope that a small rebound may be in the making.

The Bohai-Rim Steam-Coal Price Index, a benchmark for China’s coal price, has increased to a nine-month high of 401 yuan (US$60.25) per ton since June 8, according to the National Energy Administration.

On June 23, shares in listed coal companies on the mainland rose 0.3 percent, compared with almost a half-percent drop in the Shanghai Composite.

Shares in a listed coal-investment fund operated by Fullgoal Fund Management Co surged 16.3 percent in the 13 trading days ending June 30.

“The supply-demand situation is radically changing,” fund manager Wang Lele wrote in a note. “We can expect further rises in the coal price.”

China is the biggest user of coal in the world, with 60 percent of its energy consumption based on the black mineral. The nation, which uses about 4 billion tons of coal every year, pledged at the Paris Climate Conference last year to reduce coal-burning by 60 percent by the end of 2020.

Still, coal remains a cheap and plentiful alternative to nuclear, solar and wind power construction and generation, at least for the time being.

In an effort to reform the coal industry and make it more efficient, the Chinese government has said 345 coal mining companies producing low-quality coal will be closed. No figures have been published on the number of laid-off miners, but the government has allocated 27 billion yuan to cover severance pay, Wang said.

Overcapacity targeted

The slump in the coal industry began in 2013, when overcapacity led big coal mining regions Inner Mongolia and Shanxi Province to start a national price war. The government waded into the controversy by giving subsidies to coal companies. In November that year, average coal prices in China plunged 7.8 percent from the beginning of the year.

Peng Yi, general manager of the China Coal Group, said in a recent interview that even with rising prices, overcapacity takes years to correct.

“The largest demand for coal comes from the manufacturing sector, which is sluggish at present,” he said.

In the first five months of this year, electricity consumption in the industrial sector — an indication of production levels — edged up only 0.4 percent.

Peng warned that rising prices could again trigger production increases, leading to more overcapacity.

“Soon prices will fall,” Peng predicted.

The question remains, can an industry that is blamed for dirty urban air and even climate change really make a comeback?

Coal is the only energy-generating sector in China that has been losing ground. Last year, domestic electricity production grew by 0.5 percent, or 25 billion kilowatt-hours, from a year earlier. Solar power increased by 20 billion kilowatt-hours, hydraulic power rose by 70 billion kilowatt-hours, wind was up 40 billion, and nuclear power gained 30 billion. Coal-fired power generation dropped more than 4 percent, according to the National Statistics Bureau.

The recent slight rebound in coal prices mainly reflects demand for coking coal, which is used to make steel, rather than for steaming coal used in power generation, said Zhang Qi, an analyst at Haitong Securities.

He is a bit skeptical of the price gains, saying they may be more speculative than based on industry fundamentals.

“I just see no reason for any price rise in steaming coal,” he said. “Even for coking coal, the increase is odd because metal prices are declining.”

Globally, coal plays a big role in energy. In Germany, coal-fired stations contribute to more than 40 percent of the nation’s energy mix, according to Greentech Media, a global news platform in the energy sector.

“The key point there is that they are using clean coal,” Wen Ge, the online pseudonym used by a worker at German-based industrial group Bayer, told Shanghai Daily. “Coal plants can manage zero-carbon emission if the energy-generation process is treated properly. To produce the same amount of stream used in electricity generation, the cost of gas development and application is three times higher.”

China is working on clean coal technologies as one solution to meeting its target of a 180-million-ton reduction in carbon emissions in the next five years.

Wen said he thinks that will be a hard target to meet. To achieve it, coal plants would need to invest almost 90 percent of their revenue in clean energy technology.

“No company wants to undertake that by themselves,” he said. “No doubt there are many social benefits, but given such a high cost, the coal plants won’t move until they are forced to do so by government policy.”

China Shenhua Energy Co claims it is a “poster child” for this transformation. The company said it reduced carbon-dioxide emissions by 100,000 tons in a pilot project across the Beijing-Tianjin-Hebei region of northern China. Some analysts doubt the claim.

China lags countries like Germany in adopting clean coal.

“Germany has taken decades to get there,” Wen said. “In the end, it is a matter of public attitudes and government incentives, not simply companies bearing the burden by themselves.”

Zhang still has his doubt about the investment prospects in the coal industry.

“Few companies have stood out in industrial restructuring, so why should investors be positive about coal?” he asked.

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