As the supply-side structural reform in the coal industry continues to deepen, the supply-demand relationship in the national coal market is evolving from basic balance towards a higher level of dynamic assurance. A series of long-term mechanisms, such as the "medium- and long-term coal contract" system and the "base price + floating price" pricing mechanism, have played a crucial role in maintaining the stable operation of the industry. It is anticipated that in 2018, China's coal supply structure will continue to optimize, and the market supply and demand will be generally balanced with a slight surplus.
On November 27th, the National Bureau of Statistics released economic efficiency data for industrial enterprises above a designated size. In the first ten months of this year, the main business revenue of coal mining and washing enterprises increased by 34.1% year-on-year, and profits increased by 628.8% year-on-year. The rapid growth in profits of the coal industry is closely related to the continuous advancement of supply-side structural reform. Since the beginning of this year, with the ongoing efforts to reduce overcapacity, coal production, supply, and consumption have increased, the market supply and demand have been largely balanced, industry benefits have gradually improved, and new progress has been made in structural adjustments. As changes occur in China's coal industry layout, consumption structure, and supply-demand patterns, imbalances in supply have begun to emerge in some regions, posing new challenges for resource variety and transportation capacity allocation.
Economic Operational Quality Significantly Improved
The coal industry is one of the key sectors for capacity reduction. Since the State Council issued the "Opinions on Resolving Overcapacity and Achieving Development for the Coal Industry" last year, persistent efforts have led to the effective resolution of coal overcapacity, a basic balance in market supply and demand, further optimization of the industrial structure, and improved economic operational quality and efficiency. Data shows that in the first ten months of this year, national coal output reached 2.853 billion tons, a year-on-year increase of 4.8%; net coal imports were 220 million tons, a year-on-year increase of 12.8%; total social coal inventories decreased by over 100 million tons; preliminary estimates suggest national coal consumption was around 3.26 billion tons, a year-on-year increase of 3.7%.
At the "2018 National Coal Trade Fair" held recently, Lian Weiliang, Deputy Director of the National Development and Reform Commission, stated that since the beginning of this year, market supply and demand have remained generally balanced. However, influenced by various factors, particularly historical accumulated illegal and non-compliant issues that constrained capacity release, some localized areas experienced tight coal supply and price fluctuations. With the implementation of measures such as promoting the release of high-quality capacity and enhancing coal transportation capabilities, coal production, transportation volume, and inventory have all significantly increased. From a macroscopic perspective, current coal supply and demand are generally balanced.
"As the supply-side structural reform in the coal industry continues to deepen, high-quality capacity is gradually being released, and backward capacity is being phased out. The construction of coal transportation channels is accelerating. The supply and demand relationship in the national coal market is evolving from basic balance towards a higher level of dynamic assurance, and the quality of coal economic operations has also significantly improved," said Wang Xianzheng, President of the China National Coal Association.
In the first nine months of this year, the output of the top eight coal enterprises accounted for 38.92% of the national total output, indicating increased market concentration and enhanced stable coal supply assurance capabilities. The number of coal mines nationwide has decreased from approximately 12,000 at the end of 2015 to less than 8,000 currently, with large, modern coal mines becoming the main body of national coal production and supply. Furthermore, new progress has been made in the integrated development of the coal upstream and downstream sectors, the modern coal chemical industry has entered the stage of industrialization, and new industries, new business forms, and new models are continuously developing. Industrial transformation and upgrading have seen exploration, practice, and gained experience.
Guiding coal prices to a reasonable range is an important indicator of comprehensively improving the quality of the supply system. Last year, the "medium- and long-term coal contract" system and the "base price + floating price" pricing mechanism, established by upstream and downstream coal enterprises on the basis of mutual benefit, win-win cooperation, and independent negotiation, played a crucial role in ensuring stable coal supply and maintaining the smooth operation of the industry.
"Establishing the 'medium- and long-term coal contract' system and the 'base price + floating price' pricing mechanism is not only a reflection of market value laws but also an institutional and mechanism guarantee, and a significant step forward in the construction of a modern economic system," said Wang Xianzheng.
Reporters learned that, based on the actual operational situation this year, the signing volume of medium- and long-term contracts by large national coal enterprises generally exceeds 80%, and the price of 5500 kcal thermal coal under medium- and long-term contracts at Qinhuangdao Port has remained stable within a reasonable range of 560 to 570 yuan/ton. Wang Xianzheng stated that practice has proven that medium- and long-term contracts are beneficial for optimizing resource and transportation capacity allocation, stabilizing coal supply fundamentals, promoting coordinated development of upstream and downstream sectors, stabilizing market expectations, and reducing price fluctuations. Therefore, it is recommended that coal suppliers and demanders build new strategic partnership relationships, increase the proportion of direct purchase and direct sale medium- and long-term contracts, stabilize the market, stabilize prices, and promote the coordinated development of upstream and downstream coal industries.
Currently, the downward movement of coal prices towards a reasonable range is a result of the market playing a decisive role in resource allocation, a better leveraging of government's role, and a shared expectation for the healthy development of coal and downstream related industries," said Lian Weiliang. He noted that market coal prices are still relatively high, and relevant government departments will continue to implement comprehensive measures to guide coal prices downwards and keep them within a reasonable range.
Lian Weiliang stated that persistently high coal prices are detrimental to the exit of outdated and high-cost production capacity, to reducing energy costs for the entire society, and even more so to the coordinated development of upstream and downstream industries. Conversely, low coal prices are also not conducive to the safe development of the coal industry and energy saving and consumption reduction across society, and are even less conducive to the development of clean energy. The government is capable of guiding coal prices to fluctuate around a reasonable range, avoiding large swings, by establishing an industry operating mechanism that features effective market mechanisms, vibrant micro-entities, and appropriate macro-control.
Reporters learned that relevant national departments have established a series of long-term mechanisms, including a quota trading system for capacity additions and reductions, a maximum and minimum inventory system, a peak-shaving and emergency reserve capacity system, and a reduced production system under special circumstances. These measures are designed to effectively prevent coal overcapacity and, consequently, prevent coal prices from falling below the lower limit of the reasonable range.
Currently, the downward movement of coal prices towards a reasonable range is a result of the market playing a decisive role in resource allocation, a better leveraging of government's role, and a shared expectation for the healthy development of coal and downstream related industries," said Lian Weiliang. He noted that market coal prices are still relatively high, and relevant government departments will continue to implement comprehensive measures to guide coal prices downwards and keep them within a reasonable range. Lian Weiliang stated that persistently high coal prices are detrimental to the exit of outdated and high-cost production capacity, to reducing energy costs for the entire society, and even more so to the coordinated development of upstream and downstream industries. Conversely, low coal prices are also not conducive to the safe development of the coal industry and energy saving and consumption reduction across society, and are even less conducive to the development of clean energy. The government is capable of guiding coal prices to fluctuate around a reasonable range, avoiding large swings, by establishing an industry operating mechanism that features effective market mechanisms, vibrant micro-entities, and appropriate macro-control.
Reporters learned that relevant national departments have established a series of long-term mechanisms, including a quota trading system for capacity additions and reductions, a maximum and minimum inventory system, a peak-shaving and emergency reserve capacity system, and a reduced production system under special circumstances. These measures are designed to effectively prevent coal overcapacity and, consequently, prevent coal prices from falling below the lower limit of the reasonable range.
Currently, the coal industry's economic benefits are steadily recovering. Looking at future trends, China's macro economy will continue to maintain a stable and positive growth momentum, and coal demand is expected to remain largely stable. With the deepening of supply-side structural reform, the effects of policy measures are gradually becoming apparent, leading to an increasing proportion of high-quality coal production capacity and improved quality of effective supply. According to forecasts by the China Coal Industry Association, China's coal supply structure will continue to optimize in 2018, and the market supply and demand will be generally balanced with a slight surplus.
"However, we must also recognize that imbalances in the coal industry's development are still very prominent," Wang Xianzheng pointed out. He noted that the national coal overcapacity situation has not fundamentally changed, the foundation for coal market supply and demand balance is still relatively fragile, and issues such as difficulties in relocating personnel from closed and exited coal mines, challenges in handling asset debts, difficulties in transferring "three supplies and one property management" (water, electricity, heating, and property management services), heavy historical burdens on enterprises, and difficulties in recruiting for frontline coal mining jobs are still quite prominent. A significant number of enterprises have turned losses into profits but have not yet fully escaped their difficulties, indicating that achieving healthy industry development remains a long and arduous task.
Wang Xianzheng emphasized that at present, it is still crucial to unswervingly deepen supply-side structural reform, resolutely exit capacity that does not meet standards in accordance with laws and regulations, firmly withdraw high-safety-risk capacity, and accelerate the exit of outdated capacity that is resource-depleted, high-cost, low-quality, difficult to extract, and beyond hope of turning around. Simultaneously, efforts should be made to develop advanced capacity, accelerate capacity replacement through reduction, mergers, and reorganizations, and promote the completion of procedures for coal construction projects and coal mines with approved increased production capacity.
"We also need to properly manage the relationship between capacity reduction, structural optimization, and transformation and upgrading," Wang Xianzheng said. He stressed the importance of relying on scientific and technological progress, widely utilizing the internet, big data, and advanced mining technologies, processes, and equipment to optimize production layouts. This includes vigorously developing coal mining mechanization, informatization, and intelligentization, transforming coal production methods, improving total factor labor productivity, promoting green and efficient coal development, and enhancing the industry's development level. Regarding the promotion of clean coal utilization, he advocated for vigorously developing clean coal utilization and conversion technologies and equipment, appropriately developing the coal chemical industry, promoting the shift of coal from being solely a fuel to being both a fuel and a raw material, transforming coal consumption patterns, and facilitating clean and efficient coal utilization.
Furthermore, efforts should be made to accelerate the development of coal-power integration, promote enterprise mergers and reorganizations, strive to develop large backbone enterprise groups, and improve industrial concentration and competitiveness. It is also important to expedite the construction of a robust coal market system, encourage the integrated development of coal e-commerce and modern logistics industries, develop and improve the coal futures market, encourage large enterprises to utilize futures hedging functions to mitigate operational risks, strengthen management, and promote innovation in enterprise business models. (Excerpt from Xinhua News Agency)
