Big Coal Is Downsizing in China, and Stock Investors Like It

Eric Johnson
May 12, 2014

BEIJING (TheStreet) -- Struggling coal companies in China may be preparing for large-scale layoffs and other cost-saving moves now that banks have reportedly stopped extending credit to a state-owned mining giant.

News that lenders may force major downsizing at domestic mines -- including the powerful Longmay Mining Group, which employs about 250,000 people in northeastern China -- pushed coal company stock prices higher Monday on mainland and Hong Kong stock markets.

Gaining 10% each on the Shanghai Stock Exchange were shares in affiliated but separately listed, state-owned miners Shanxi Coal International and Shanxi Coal, which respectively closed at 4.31 yuan and 4.48 yuan. Meanwhile, Yanzhou Coal rose 10% in Shanghai to close at 7.22 yuan, while its Hong Kong-listed shares climbed 4.5% to close at HK$6.03.

Hong Kong shares in the Canadian and Toronto-listed miner South Gobi, which extracts coal in Mongolia and sells it to China, rose 2.5% to end at HK$4.76.

Shares in China's largest coal concern, Shenhua Group , gained 4.6% to close at 14.78 yuan on the Shanghai exchange. The company's Hong Kong-listed shares ended the day 2.8% higher at HK$21.65.

Also on the Shanghai market, Datong Mining, the country's third-largest coal concern, rose 9.9% to 6.20 yuan, while second-largest China Coal Energy jumped 7.8% to close at 4.51 yuan.

In December Shenhua signed an agreement with America's Peabody Energy to streamline Chinese imports of foreign-mined coal, which is one reason why domestic miners are under pressure to downsize.

China mines and consumes more coal than any other country. But rising imports for power plants, mainly from Southeast Asia, as well as slowing demand for coking coal for Chinese steel plants and other types of coal for manufacturing have pushed prices down.

Demand for domestic coal has also been hit by a government push to clean the nation's air by burning less-polluting coal in power plants and factories.

In the face of rising imports and sliding demand, coal has been piling up at the nation's seaports for more than two years.

The government's customs agency recently said nationwide coal stockpiles as of Jan. 1 totaled about 84 million tons, up 30 million tons in early 2012, mainly due to a surge in imports. Most imported coal comes from Indonesia, the Philippines and Australia.

Coal prices and domestic coal-mining company profits have been falling, the customs agency said, adding that average coal company earnings fell 38% in the first 11 months of 2013.

Thus it was no real surprise when Longmay, a wholly state-owned concern with mines in Heilongjiang Province, reported a record first-quarter loss of 1.6 billion yuan last week. That was on top of a 2.28 billion yuan loss reported last year.

Then, on Monday, the China Business Journal hit an investor nerve by reporting that four state-owned banks had stopped extending credit to Longmay. The credit cuts started in January. As a result, the company has been trimming production in hopes of surviving what's been a 26% decline in coal prices since last year.

The report said Longmay recently reduced wages for some workers, and that others are still waiting for long-overdue paychecks.

News of Longmay's distress followed a report last month that Yanzhou had cut about 5,400 jobs last year after posting a first-half 2013 loss of 2.3 billion yuan. Another 13,000 jobs, or 18% of its workforce, are expected to be eliminated by 2016.

Instead of cutting costs and jobs, most coal companies have so far responded to the changing business climate by leaning on government subsidies and projects to balance the books. Local governments with stakes in mining companies, for example, have been paying for various kinds of "new energy" projects, such as construction of coal gasification and liquefaction plants.

A Citic Securities report said Yanzhou will likely turn a profit at least in the first half of this year thanks to government support. The company received government subsidies of 157 million yuan in the first quarter and 115 million yuan in grants from the city of Ordos, the report said.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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