China's Mines Stay Shut

China has failed to meet demand to reopen thousands small coal mines, which has worsened the country’s current power shortage. Also, local officials still fear Beijing's wrath if they suffer more high-profile disasters.

Weeks after the central government urged miners to reopen the mines, effectively reversing a years-old policy of shutting them in order to improve safety in the world's deadliest coal industry, local officials are proving reluctant. And Beijing's freeze on coal prices has lowered the incentive for miners.

The failure to boost domestic coal supplies spells trouble for coal-fired electricity generators who produce four fifths of China's power, and could add to this summer's emerging power crisis, which has already forced aluminium smelters to cut output by up to a tenth and could stoke demand for oil.

"Local government officials are more concerned about personal interest. They are afraid of the punishment a mine accident could bring to them," said Li Chaolin, a coal analyst at an industry body based in Beijing.

They are right to be concerned. Six government officials in the Luliang region of Shanxi were sacked after a blast at a small mine, approved to re-open just a month earlier, killed 34 in June, the state-run Xinhua news agency reported.

China has been pushing forward a safety campaign for three years, shutting down the kind of small, inefficient and often dangerous mines that provided 38% of its coal last year.

Around 90% of China's coal mines are classified as small, but they are eight times more deadly per ton of coal produced than the larger mines.

From 1995 to early 2008, the number of coal mines in China had fallen around 80% to about 16,000. Over the same period the death toll is down 40% to 3,786 in 2007, according to the State Administration of Coal Mine Safety.

Beijing's goal is to reduce the number of small mines to under 10,000 by 2010, and to eliminate them by 2015.

But in late May, when coal stocks in the country's key power plants had fallen to critical levels and summer power shortages loomed, China's premier Wen Jiabao called for an increase in coal output, while the country's cabinet asked local governments to speed up approvals for restarting small coal mines.

Some have returned to production in Shanxi, China's top coal producing province, but many are still closed or performing maintenance, traders and analysts said.

And in late June, the Shanxi provincial government ordered local governments to shut down illegal coal mines, highlighting the conflicting signals that have kept officials cautious.

"How can local officials re-open small mines? They want to keep their jobs," said a trader based in Shanxi, who declined to be named.

PRICE CAP INEFFECTIVE

Last month, Beijing froze the price miners are paid for thermal coal until the end of the year as it seeks to cap power prices, knocking shares of listed coal firms such as China Coal Energy Co and China Shenhua Energy Co lower.

But this has had the perverse effect of discouraging mine production and making coal exports more attractive, while not doing anything to cut losses at power generators as the order does not cover prices further down the distribution chain.

In two years China's power generators have received just a 4.7% increase in the state-set prices they can charge; not enough to offset the soaring price of coal, which until June's freeze had been freed to float with the market.

Asian benchmark thermal coal prices have trebled in just a year to record highs, while domestic supplies remain tight, so local prices should keep rising.

"Miners understand if they don't dig out all the coal now, they can sell later for a better price. Natural resources will only get more precious," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University.

IMPACT ALREADY FELT

The impact of the coal shortage is already being felt. There have been record power shortfalls in Shanxi Province, where the government had to ration power supplies, hurting energy-intensive plants such as aluminium smelters.

China's top 20 aluminium smelters, including Aluminium Corp of China Ltd (Chalco), will cut production by up to 10% to reduce power consumption.

Other industrial provinces, such as Shandong in the north and Guangdong in the south, have forecast deep power deficits.

Henan, another big aluminium producing province and one of the nation's most popular, has started to restrict power to industrial users in eight regions and cities, while Shanxi province on Thursday said it had begun to ration power supplies as power plants ran short of coal.

Some of the power shortfall can be met by diesel generators, and in fact during the last major power crisis in 2004 China's diesel demand surged by 15%, helping oil prices' first ascent above $50 a barrel.

The ultimate solution, though, would be to allow markets to set power tariffs, but Beijing would be reluctant to make such a move when inflation is already near a 12-year high.

"If the power tariff is opened up, all problems will be solved but its possible impact on the economy is still in question," said Lin of Xiamen University.
($1=6.860 Yuan).