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2016.07.27 07:19
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China’s supply-side reform bears fruit for coal industry

China’s coal industry has endured low revenues in recent years, but as supply-side reforms are implemented the sector is beginning to enjoy the benefits. 

A key element of the reforms is reduction of overcapacity. And the coal industry is now leading steel in capacity reduction – and making profit, according to China’s Finance Ministry.

Reducing overcapacity in coal and steel is a key concern for the country. 

“How the steel and coal industries will reduce their overcapacity and properly deal with “zombie businesses” and turn loss into profit is substantial,” Feng Liguo, associate research fellow of the China Enterprise Confederation, told Chinese paper Securities Daily.

A coal factory in China's Hubei Province on July 2016. (Photo: CFP)

The country is now showing some positive results in its drive to lessen overcapacity. Deng Jue, coal analyst at ICIS, the world’s largest petrochemical market information provider, says that the rising prices and emergence of profits in the coal industry are clear indicators that capacity was reduced in the first half of 2016. 

China now has 22 municipalities, provinces and autonomous regions that have issued and implemented local policies regarding reduction of coal production in the next three to five years, according to Securities Daily. Shanxi Province, for example, plans to reduce coal production by 100 million tons by 2020.

Zhao Chenxin, spokesman for the National Development and Reform Commission, said earlier this month that the goals each local government has set are like a ‘military order’ that has to be reached, or else they will face “severe consequences.”

A steel factory in China's Anhui Province on July 2010. (Photo: CFP)

Coal and steel prices have rebounded recently, causing concern that local governments may reduce their enthusiasm for tackling overcapacity. Zhao said that some halted businesses may even look to reopen their mothballed factories. But the broader determination to lessen overcapacity will not be changed by a short-term price change, he added.

The People’s Daily published an interview in May citing an “authoritative figure” saying that government work should center on supply-side reform both currently and in the future.

The reforms include five measures: reducing overcapacity, reducing stockpiles, de-leveraging, lowering business costs, and fixing shortcomings.