China: a large number of energy cities on the verge of bankruptcy 01-19-2016

There are 103 counties among 119 of Shanxi Province can’t afford the wages. During the first three quarters in 2015, the coal enterprises in Shanxi Province suffered a net loss of RMB 7,037 million and defaulted on the unpaid wages of RMB 3.5 billion and social insurance of RMB 10.9 billion.

Source: Internet

 

The Coldest Winter

Influenced by the domestic and overseas situations, the coal industry in Shanxi Province had suffered heavy hit since 2013 and had been trapped in the situation of consecutive losses for 12 months since July 2014.

 

In the first three quarters of 2015, the coal enterprises suffered net losses of the first three quarters has been RMB 7,037 million, defaulted on the unpaid wages of RMB 3.5 billion and social insurance of RMB 10.9 billion.

 

“There are 119 counties, among which 103 were behind with the wages of workers.” according to an official of Shanxi Province who asked not to be named. The terrible economic condition in Shanxi Province is obvious.

 

The coal industry entered into the Golden Age since 2002. The coal price soared all the way to RMB 1,070 /tonnes in July 2008 from less than RMB 200 /tonnes in 2002; then with a fall after the rise due to the financial crisis, the price backed to its upward track again in August 2009. The price of the steam coal in the Bohai Bay Rim, the wind vane of the coal market, reached to its highest level of RMB 853 /tonnes in 2011.

 

Since 2013 the coal enterprises profit has been devouring with the plunged coal price. During the first three quarters of 2015, the profit of the coal enterprises at national scale dropped more than 64.4% year-on-year, the scale of the industry deficit reached to 80% or more; while the situation in the fourth quarter was even worse.

 

The state-owned coal enterprises gained RMB 30 billion in 2014, but lost 22.3 billion in 2015 with the coal inventory of more than 300 million tonnes in 46 consecutive months. Six Provinces—Heilongjiang, Jilin, Liaoning, Hebei, Shandong and Anhui—were faced with coal industry losses.

 

Cannot Stop but Expanding

 

 “The capacity expansion went too fast,” complained some directors of the coal enterprises.

 

Since 2006, the cumulative investment in the fixed assets of the coal mining and processing totaled RMB 3.6 trillion with the increased capacity of 3 billion tonnes; while in 2015, the national coal capacity gained more than 4 billion tonnes and the capacity of the project under construction was more than 1 billion tonne. According to a coal industry analyst, “There is excess capacity of at least 300 to 400 million tonnes among the 5 billion tonnes of general capacity.”

 

 “The severe overcapacity is the major problem in the coal industry for the time being,” said Zhu Qiyuan, the secretary general of the Economic Transition and Enterprises Development Seminar of Shanxi Province.

 

“In Shanxi, some newly built projects of the coal enterprises turned into the inefficiency and idle assets due to their low technology and high labour intensive.” according to a department official of Shanxi Province, the overcapacity is the crux.

 

Shanxi is the typical resource-oriented province, in which the industries of coal, coke, metallurgy and electricity accounted for more than 85% of the industrial added value. Almost all the industry in Shanxi Province suffers the excess capacity.

 

 “To keep the growth trend, some local enterprises propel many unbefitting projects.” After his on-the-spot investigation in several provinces and counties across the country, Zhu Qiyuan found that the coal enterprises would never halt their production; many of them may give up the price advantage pre but never the market share. That’s the reason for the vicious cycle of further overcapacity and further price falling.

 

According to some statistics, the debt of the five major coal enterprises of Shanxi Province has reached to hundreds of billion each. Up to the end of the June 2015, the asset-liability ratio of the five enterprises was 78.5%; the interest expense was RMB 17.45 billion, with the year-on-year growth of RMB 1.93 billion.

 

“Yang Quan Coal Industry has repaid its debt of RMB 28 billion in 2015; while in 2016, the repayment would be RMB 46 billion,” said a manager of Yang Quan Coal, the result of halt is hard to bear for the coal enterprises.

 

However, the burden of the enterprises is far more than that. The retirement pension system for the retirees of the coal workers has also been supported by the coal enterprises.

 

“The overcapacity reflected the deep-rooted structural contradictions of the enterprises in China.” According to Li Chaolin, a coal analyst, it is significant that how the enterprises would come to a halt and back out of the play.

 

No Way Back

 

Li Chaolin believed that the coal industry has been in the crisis moment. The risk of industry dilemma would multiply if no decisive measures are taken for the temporary and permanent cure.

 

“The fundamental measure for coal industry to achieve the sustainable and healthy operation is to advance the transformation and upgrading of the industry. The whole industry should notice the importance of structure reform, technology progress and de-capacity.” said Li Chaolin.

 

Premier Li Keqiang offered a prescription: on one hand we should transform and upgrade most of the old economic engines; on the other hand we should uncompromisingly eliminate the Zombie Companies and renovate the enterprises with the “absolute excess capacity”.

 

This means the upcoming policy for the withdrawal mechanism of the coal mines would bring the industry a new tide of merging and reorganization.

 

"We should encourage the enterprises to achieve the coal-electricity integration by the means of controlling and taking shares.” According to Lian Weiliang, the deputy director of the National Development and Reform Commission (NDRC), there are more than 7,000 coal mines of less than 300 thousand tonnes per year in China at the moment, the total capacity of which is 570 million tonnes per year. Those enterprises are the main target of the merging and reorganization.

 

The Central Economic Working Conference proposed that we should promote market-based bankruptcy proceedings in conformity with legal provisions, put forward and implement the policies for the support of finance and tax, disposition of non-performing asset, the re-employment of the unemployed and the special-purpose fund and subsidy.

 

“In this way, the local governments are able to save the huge subsidies for the Zombie Companies and Zombie Capacity to encourage the bankruptcy, so as to achieve a stable and well-organized capacity withdrawal.” According to analyst Xu Xiangchun, it has always been blamed that the enterprises can’t smoothly go through the bankruptcy and clearing, which, to Xu’s point of view, is the crux of the overcapacity in China; therefore the government should work out an explicit and definite system for the clearing as soon as possible.

 

*This article is a re-edited and translated version by CCM. The original version comes from www.cnchemicals.com/.

 

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