Published: October 27, 2016 |

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International coal prices will likely face downward pressure now that the Chinese government has instructed major mining companies to quickly increase production, an about-face driven by a desire to control inflation.

The National Development and Reform Commission, the body in charge of economic policy, summoned executives of Shenhua Group and 21 other domestic coal-mining concerns Tuesday. A high-ranking commission official noted a tightening supply-demand balance and told the companies to get output back on track as soon as possible at mines compliant with environmental and safety regulations. The goal is to “stabilize prices,” the official said.

The 276-day annual limit on operations at such facilities was relaxed this month. This meant that 1,500 or so mines recognized as compliant would step up production, local news media reported.

WHACK-A-MINE

China’s coal output capacity totaled some 5.7 billion tons at the end of 2015. But the year’s actual production amounted to 3.7 billion tons or so, lending credence to the view the nation is sitting on 2 billion tons in excess capacity. The government announced a goal in February of reducing capacity by 1 billion tons in three to five years. With at least 200 million tons slated for elimination this year alone, many coal producers have closed old mines.

Chinese coal output dropped 10 percent on the year in the January-September period. Inventories of coal for power generation fell by nearly half as a result. With speculators betting on a tighter market in the world’s top coal-consuming country, prices have risen more than 50 percent from the start of the year.

Costlier coal means higher prices for electricity and steel, pushing up input costs in a broad range of industries. China’s September wholesale price index clearly shows an uptrend, indicating a strong likelihood of upward pressure on consumer prices down the line.

JOB ONE

Price stability is the top priority of economic policy, Premier Li Keqiang said back in 2011 as vice premier. Chinese leaders have long paid close attention to inflation, since rising prices tend to increase public dissatisfaction with the government. So it is understandable that the current leadership has ordered coal-mining companies to boost production.

But in so doing, China also jeopardizes its own efforts against overcapacity. A commission official stressed in a news conference Tuesday that the coal industry has already reached at least 80% of the capacity reduction target for the year. The world will keep a close eye on the government’s next step.

Source: (October 26, 2016) Asian Review

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