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Chinese provinces announce deeper coal capacity cuts

WhileBeijing aims to slashthe country's annual coal capacity by around 10%, or 500 million tonnes, overthe next five years, China's local governments are targeting a more aggressivereduction of up to 30%.

Sincefive Chinese provinces announced in March that they planned to 273 million tonnes incoal production capacity; another six have stepped up to announce additional cutstotaling 607.4 million tonnes.

"Somelocal governments are eager to show their determination to Beijing," DengShun, a coal analyst with consultancy ICIS China, told SNL Metals & Mining.

Thelion's share of cuts from the latest announcement will be in Shanxi, whereauthorities announced a bold plan to cut between 400 million tonnes and 500million tonnes over the next five years and to maintain capacity under 1billion tonnes, Xinhua News Agency said April 5.

Asof November 2015, Shanxi had 1,078 coal mines with a combined annual capacityof about 1.46 billion tonnes, the report said.

Deng said an accident at a coal mine in the province ownedby Datong Coal Mine Group Co. Ltd. — the parent company of — onMarch 23, which killed 19 people, convinced local authorities of the need tomove ahead with a more ambitious capacity cut.

"While the accident is still underinvestigation, theprovincial government needs to make a firm stand to demonstrate its controlover the local coal industry," Deng said.

Besidesthe up to 500-million-tonne cut in Shanxi, the 607.4 million-tonne reductionalso includes 63.1 million tonnes in Hebei, 17 million tonnes in Anhui, 11.8million tonnes in Jiangsu, 8 million tonnes in Hubei and 7.5 million tonnes inFujian.

InHebei province, local authorities plan to close 114 coal projects with acombined annual capacity of 63.1 million tonnes in the next three to fiveyears, China Coal Resources reported March 31.

Thenewswire separately reported earlier in March that coal capacity in Anhuiprovince will drop by 17 million tonnes to 150 million tonnes over the nextfive years.

InJiangsu province, in eastern China, the local government plans to close 47.7%of its total capacity by 2020, according to a notice issued by the localauthorities in March.

Among20 coal mines in Jiangsu, which have a combined annual capacity of about 24.8million tonnes, 11 coal mines totaling 10.2 million-tonne annual capacity willbe closed this year, two in 2018 and one in 2020.

TheHubei provincial government will also close 80 to 100 coal projects over thenext five years, with a reduction target of 8 million tonnes, while southChina's Fujian province said it would close 113 coal projects totaling 7.5million tonnes, according to separate media reports.

Thesereduction plans represent about 20% to 30% of total capacity in theirrespective provinces, and other provinces, including Shaanxi — a coal-producing center, are likely to follow,according to Deng.

However,the determination of Chinese authorities to cut coal capacity could benefitsmall, high-cost coal producers, according to Deng.

"Itis not the first time that China has tried to intervene in the market with anadministrative order. The government might get the big producers in line, butthey have little control over small, privately owned companies," Deng said.

Dengadded that some small and medium-sized coal producers have resumed productionin recent months, as the announced plans to cut capacity has reduced marketsupply from big producers and boosted prices domestically.

"Productioncosts of Chinese large producers are generally lower than the small ones, butthe capacity cut has created an opportunity for small, high-cost mines thatwould otherwise have had to close in the low-price environment," he said.

Meanwhile,Deng expected these plans to have limited impact on the industry over the longterm.

"Atthe beginning, provincial governments are likely to strictly implement theseplans as capacity reduction is one of the central government's top prioritiesthis year," Deng said.

"However,over the longer term, provincial governments lack the motivation to cutcapacity because of tax and employment concerns."