Hard economic lessons as China's coal boom ends

DEC 9, 20155:44 PM

[DATONG, China] Coated in thick black dust, hundreds of miners emerge after another shift gouging out the coal that fuelled China's boom and its choking pollution - an industry now crippled by oversupply, but whose companies are seen as too big to fail.

The Tongmei Group they work for deep underground is typical of the lumbering and inefficient state-owned firms that dominate cities in China's industrial heartlands.

The firm is the lifeblood of Datong, a city of three million people. It employs some 200,000 staff with nearly a million family dependents, housing and entertaining its workers and even running hospitals.

And it is in trouble.

For decades, coal has been the backbone of the northern province of Shanxi, providing livelihoods for millions of miners, while private jet owning bosses became notorious for their nouveau riche lifestyles.

China's consumption of the fuel doubled in the decade to 2014 as the economy soared, reaching more than four billion tonnes a year.

That exacerbated a chronic and dangerous smog problem - Beijing declared its first "red alert" for pollution this week - and made China the world's biggest emitter of greenhouses gases, putting it at the centre of crunch climate change talks under way in Paris.

Now, some observers say China's coal demand may have peaked - a confluence of economic growth slowing to its lowest rate in 25 years and Beijing starting to reduce the carbon-dioxide-spewing fuel's share of the national energy mix.

That has dragged coal prices down to their lowest level in a decade, putting the squeeze on Tongmei.

But manager Liu Congying says despite the shrinking market, he has little choice but to supply even more - the mine operates 24 hours a day with a maximum output of 6,000 tonnes an hour.

"If we didn't increase production, we could not continue to run the business as we do now... including paying wages," said Liu.

"It's clearly not a sustainable policy".

Relatively poor Shanxi's population is nearly 40 million - more than Canada's - and official statistics show its GDP grew just 2.8 per cent this year.

Many of China's giant state-owned enterprises (SOEs) are unviable and plagued by overcapacity, with reports in September saying a mining group in the northeastern province of Heilongjiang will sack 100,000 workers, in what analysts called a taste of the pain to come.

Liu - who began toiling in the pits five decades ago - denied that Tongmei planned layoffs, telling AFP: "We need to preserve social stability." But the firm is "probably running out of money", said industry analyst Zhang Zhibin.

He and other industry insiders think that China's coal consumption has peaked and may even decline in the next few years.

That is a potential boon to China's attempts to reduce smog and cut greenhouse gas emissions, but a disaster for cities such as Datong.

"We will see bankruptcies in the sector in the next few years," Zhang added.

Premier Li Keqiang last week called for a "cut back on overcapacity in traditional industries as well as a large number of zombie enterprises", in remarks state-run media said were directed at coal and steel.

But there are few signs the government is willing to turn off the financial taps and risk widespread unemployment, with the potential for anger and unrest - anathema to the Communist Party.

"The state sector is inefficient and wasteful," said Joe Zhang, an SOE manager turned commentator. "But it has a central role in the Chinese social fabric." In his company-funded flat - equipped with central heating and an aquarium for golden carp - a miner surnamed Xu said: "Our homes are much better than before." His daughter played in front of a flat-screen television.

Xu's pay rose nearly tenfold in the good years after the late 1990s to peak around 6,000 yuan (S$1,310) per month, but this year he has seen a 15 per cent cut.

Shanxi officials are trying to diversify by boosting tourism and luring manufacturers away from China's coast.

Meanwhile, Tongmei is moving into electricity and chemical production.

Even so, the buzzcut 38-year-old scoffed at the idea that service industries such as tourism could be his city's future.

"Who will we serve? If tens of thousands of us start up businesses, who will buy our products?" he asked.

"We have nothing here apart from coal."

AFP