China has already sent its major telecom, oil and financial state-owned enterprises (SOEs) to the capital markets. Now, as another strategic sector – commodities – comes under the investment spotlight, one word crops up more than most: Coal.
Industry watchers claim that this wave of coal sector initial public offerings is a deliberate alteration of China’s industrial policy and is destined to continue.
“This is the first of a whole series,” said Jim Brock, a Beijing-based independent energy consultant. “When the Ministry of Coal broke up into the big SOEs, it outlined 13 major coal bases, only three of which are listed … I’d say there’s a lot more to come.”
One way in which the IPO surge may serve Beijing’s interests is by helping to modernize the country’s massive, but chaotic, coal industry. China is the world’s largest producer of coal but the two billion tons of the commodity generated each year comes from between 25,000 and 60,000 individual mines.
China depends on coal to produce 70% of its electrical power. Demand for electricity has increased nearly 50% in the last half-decade according to the Department of Energy and this has forced the state to raise the artificially low price of coal. Drawn in by potential profits, thousands of marginal producers joined the already decentralized market.
Even farmers got in on the act, finding they could make more from mining than they could working in the fields.
This degree of fragmentation plays havoc with regulation. Coal mining is known as one of China’s most dangerous professions. According to official figures, coal miners suffer a 4% mortality rate, with an average of 5,000 deaths per year.
The government estimates that only 35% of coal mines have any safety equipment and the Hong Kong Trade Development Council claims that a paltry 42% of Chinese coal mines are mechanized.
Beijing planners have tackled the job of consolidation with gusto. In 2003, there were over 75,000 small coal mines in China; in 2004, this fell to 25,000. There are plans to cut the number of small mines – producing less than 30,000 tons per year – from over 17,000 to 12,000 small mines by the end of 2007. As of June, the government was nearly halfway there.
Some private miners point out that while energy prices remain high, it will be difficult to shut down small mines run by rural residents. The small mine sector, which accounts for two-thirds of mining deaths, is also responsible for one-third of the country’s coal supply.
“These smaller mines aren’t terribly attractive,” said Geoffrey Cheng, an analyst at Daiwa Research. “Beijing would like to rely on the local governments slowing down or closing these mines.”
With consolidation taking place at the bottom end, Beijing is keen to see further modernization at the top of the market. The idea is that larger mines use their IPO money to expand and improve yields. The 164 mines in China equipped with modern technology meet 28% of the country’s coal needs. As the smaller mines close, this figure will need to rise.
Investment in technology should help reduce resource wastage. Currently, the average coal mine has a recovery rate of 30%, less than half the world average according to government sources. In 2005, Beijing announced a US$2 billion plan to improve recovery rates by 35% over five years and wants the major coal miners to chip in a further US$1.4 billion.
“The historical problem for [the coal industry] has been low recovery rates, poor utilization of resources and inability to do long-term planning … these IPOs will give them the resources they need to change that,” said Cheng.
In the long run, the IPOs are also part of a wider bid to change the way in which the coal industry is managed. By allowing companies to become more self-sufficient in terms of fundraising and administration, the government will begin to take more of a backseat role.
“The government is switching from an ownership perspective, although you probably won’t see an end to state ownership any time soon,” said Brock.
You must log in to post a comment.
Yes, I would like to receive emails from China Economic Review. (You can unsubscribe anytime)
Copyright © 2018 SinoMedia Group Limited All rights reserved