Top coal producer and consumer China cut coal output targets at the top three producing regions by as much as 7% from a year ago to ease a supply glut caused by a slowdown in economic growth, which has also weakened global prices.
The National Development and Reform Commission (NDRC), a top government economic planning agency, set China's total coal output for 2012 at 3.65 billion tonnes, an increase of just 3.7 percent from year ago and a deceleration from the 8.6 percent growth of last year and 9 percent the year before, according to a statement seen by Reuters on Wednesday.
Softening demand from China, where the economy is growing at its slowest pace in more than three years, has dragged prices of coal, iron ore and other commodities to multi-year lows, hurting the profits of global miners such as BHP Billiton and Vale SA.
Coal accounts for about 80 percent of the fuel China uses to generate electricity, but the waning growth has reduced demand for power from manufacturers and cut the increase in total electricity generation to around 2 percent so far this year, compared to 12 percent for the whole of 2011.
BULGING STOCKPILES
The NDRC said production targets for the regions of Inner Mongolia and Shanxi were reduced by around seven percent compared to last year's output and Shaanxi region's output was lowered by around one percent.
All targets are also below earlier forecasts by the local governments: Inner Mongolia, China's top coal producing province, was lowered to 920 million tonnes from an estimate of more than one billion tonnes and Shanxi's targeted output was cut to 810 million tonnes from a previous forecast of around 900 million tonnes.
Shaanxi's production target was also lowered to 400 million tonnes, against an earlier forecast of 460 million tonnes.
"NDRC's conservative production guidance for Inner Mongolia and Shanxi implies that the two provinces have to cut back their production significantly," said Helen Lau, a senior commodities analyst at investment firm UOB-Kay Hian.
Chinese miners will now follow counterparts in top coal producers Australia, Indonesia, Russia and the United States in cutting production as they grapple with global prices which have fallen about 20 percent so far this year.
The cut in output targets follows double-digit growth in coal production from Inner Mongolia and Shanxi from year ago, which had driven national output 9 percent higher and created record high stockpiles at the key Qinhuangdao port of 9.5 million tonnes by mid-June, customs data showed.
Stocks at the port were slightly lower at 7.3 million tonnes last week, but traders said they did not expect demand to increase until the end of the year at best as many power utilities overestimated their need for coal and are now left with huge stockpiles.
"Power plants have an average of 27 days worth of stocks, compared to historical norms of around 18. Even when they finish the first batch, shipments from previous orders are still rolling in," said a Singapore-based trader. "The destocking will take two to three months."
BOOST TO PRICES?
China consumes, on average, 3.6 million tonnes of domestic and imported coal a year. For the past few months, several traders have scrapped import deals for millions of tonnes of coal, while others have deferred the delivery of shipments.
China imported 118 million tonnes of coal in the first seven months of this year, mainly from Indonesia and Australia, compared to 180 million tonnes in the whole of 2011. It was not immediately clear whether the cut in domestic output would affect imports.
Some traders said the output cut may help bolster domestic coal prices, provided demand also increases. Chinese steam coal prices have fallen by about 20 percent since April to hover around 626 yuan ($98.45) a tonne last week.
"If Chinese miners can stick to the target, then coal prices should stabilise and perhaps see a rebound in the fourth quarter," said a Beijing-based coal trader. "For exporters like us, a return to price stability will also help to put an end to the large scale defaults that we saw over the past two months. It will make our lives a lot better." ($1 = 6.3586 Chinese yuan)