Black gold capacity cuts will not destabilize market

China will attempt to keep the coal market stable while continuing to shed capacity this year, according to the National Development and Reform Commission.

There are five measures the country will take to bring this about: flexible work days, replacing the existing outdated capacity with highly efficient capacity, maximum and minimum stock, mid and long-term contract and price management mechanism.

Capacity reduction remains high on the agenda though the goal in 2016－reduction of 250 million metric tons－was reached before the end of the year. The national plan for the coal industry for 2016-20 stipulates that approximately 800 million tons of capacity must be trimmed every year.

A 276-working-day restriction must be strictly observed. Yet, in times of rising demand, this restriction could be easily lifted temporarily, said Lian Weiliang, deputy director of the National Development and Reform Commission.

There is roughly 600 million tons' production in 276 to 330 work days. For instance, as coal demand rises in winter, some coal producers have been allowed to operate between 276 and 330 work days until the end of the heating season.

Wei Wei, an analyst at Pingan Securities Co Ltd, said in the next few years, coal demand would not rise significantly but remain stable. "It's doomed to fail if coal companies expect to win the market by expanding scale and increasing prices," Wei said.

Coal consumption had decreased by 2.9 and 3.7 percent year-on-year in 2014 and 2015 respectively. For coal mines under construction, the key is to replace low-efficiency capacity with high-efficiency capacity, according to the NDRC.

According to a report by Haitong Securities Co Ltd, by the end of 2015, active coal capacity was 3.9 billion tons. Meanwhile, 1.5 billion tons' capacity is being built, of which 800 million tons are illegal.

The report said that the 800 million tons of illegal capacity will be eliminated. The rest of the 700 million capacity under construction will be replaced by high-efficiency capacity, which will cut down the capacity by roughly 20 percent.