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China to cut up to 200 million tonnes in coal capacity for 2017

China's coal capacity cut target for 2017 is expected to range between 150 million tonnes and 200 million tonnes, despite the Chinese central government's move to ease production controls in the second half, according to analysts.

Liu Jie, a coal analyst with Zhuochuang Information, told S&P Global Market Intelligence that China's coal demand is estimated at around 4.1 billion tonnes in 2020, compared to the country's existing annual coal capacity of more than 5.0 billion tonnes.

"The central government has to stand firm on the program," Liu said. "Coal prices rebounded rapidly in the second half in response to the nationwide capacity cut program, but overcapacity is still a serious challenge for Chinese producers."

As of the end of 2015, China's coal capacity totaled around 5.7 billion tonnes, consisting of 3.9 billion tonnes from producing mines, 1.5 billion tonnes from mines under construction and 300 million tonnes from suspended mines, according to Liu.

"As the program continues in 2017, it will add more pressure to those producing mines," he said, adding that the capacity reduction this year was mainly from projects that had been suspended prior to the program.

Liu expected the full-year target for coal capacity reduction in 2017 to range between 150 million tonnes and 200 million tonnes.

"It will be lower than the 250-million-tonne coal capacity that has been closed this year, as difficulty will increase when the program bites deeper into producing mines," he added.

A Shanghai-based coal analyst who declined to be named said in an interview that the capacity cut will remain as the most important task amid China's supply-side reform in 2017, with both central and local governments expected to launch more incentives to advance the reduction plan.

"The central government will offer more funds to encourage capacity reduction and the local governments are also pushing for the program as the loss-making coal industry is becoming a financial burden for them," the source said.

While Beijing is expected to take the firm stand on coal capacity control next year, the source noted that the authorities may lift the annual working day limit of 276 days at some point.

The Chinese government capped the number of annual working days for domestic coal mines to 276 from 330 in May, but then allowed some advanced coal producers to resume the 330-day scheme in a bid to push miners to increase production.

"The exception is temporarily valid between Oct. 31 and Dec. 31, but we believe that the 276-day scheme will eventually be abolished," the source said.

"As a short-term policy, it has been very effective in curbing coal output, but in the long run producers' profitability would face strong headwinds if they remain to operate at such a low capacity utilization rate."

Zhuochuang's Liu also expects that there would be revision to the 276-day limit next year, and that domestic supply will stabilize as the capacity cut program enters into the second year.