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Shenhua Group, China National Coal expected to lead consolidation of state-owned coal mines

Two of China's coal majors, andChina National Coal GroupCorp., are expected to play a major role in the country's coalsector reforms, by buying up coal mines owned by central government-ownedcompanies that are not focused in the coal industry, according to marketanalysts.

Beijing recently decreed that central government-controlled companiesthat own coal mines as noncore assets are to exit the industry as part ofnationwide reforms to cut overcapacity in the sector.

However, the government gave no details as to when or howthis would be accomplished.

"An understanding in the industry is that the ChinaShenhua and China National Coal will take over a majority of these SASAC-ownedcoal assets," Deng Shun, a coal analyst with ICIS China, told SNL Metals& Mining, referring to the State-owned Assets Supervision andAdministration Commission.

"The Chinese central government has been pushing forthis long before the statement was made, urging state-owned enterprises tofocus on respective core businesses and off-load noncore operations as part ofsupply-side reforms," said Deng.

Deng added that it was unlikely for the affected mines to beordered to shut down, as that would result in losses for companies owned by theSASAC.

As of end of 2015, the SASAC controlled 16 companies thatown coal assets, including Shenhua Group, parent of , as wellas China National Coal Group, parent of China Coal Energy Co. Ltd.

A review conducted by the State Administration of Coal MineSafety in May showed that the combined annual production capacity of 210 coalmines owned by 14 SASAC-owned companies was estimated at 710.6 million tonnes,newspaper China Energy reported inJune.

Among the 210, 127 coal mines were defined as noncore coalassets, being the balance of the 55 coal mines operated by Shenhua Group with361.9 million tonnes in annual capacity and 28 coal projects owned by ChinaNational Coal that can produce 110.7 million tonnes of coal per year.

Consolidation morelikely in the longer term

However, Deng added that deals may not happen immediately asChinese coal miners are facing tight cash flows.

"Domestic banks, which are a major financing source forthe industry, are becoming increasingly reluctant to extend loans for coalproducers, despite a hike in the selling prices of coal products so far thisyear," Deng said.

A Shanghai-based coal analyst, who declined to be named,agreed that such a plan would not make any substantial progress over the shortterm.

"SASAC-owned companies will also be unwilling to sellcoal assets at the current low price level," the source said."Without further specific plans, the decision's impact on coal industrycould be very limited."

In the long run, Deng said that Shenhua Group was morelikely to engage in acquiring the noncore coal mines of other state-ownedcompanies, since the company was profitable while China Coal Energy remainedloss-making.

China Coal Energy posted a 223.1 million Chinese yuan net loss in thefirst quarter, following a 3.27 billion yuan loss for 2015, while China Shenhua's net profit forcorrespondent quarter and year was 4.74billion yuan and 17.74 billion yuan, respectively.

Meanwhile, Deng expected coal prices to continue its upwardtrend in July and August, providing support for domestic producers.

"Measures already unveiled are causing a deep outputreduction in the domestic market, and we expected to see a combination of weaksupply and robust demand in the next two months," he said, noting thatdemand for thermal coal will further increase in the coming summer season.

In the first half, China's increased 8.2% year overyear to 108 million tonnes as domestic production recorded a 10.2% year-on-yeardecline to 1.34 billion tonnes in the first five months.

As of July 13, US$1was equivalent to 6.69 Chinese yuan.