Key Takeaways
- A robust 2022 has improved the credit standing of Chinese coal miners, and this should support them through a period of moderating coal prices and high costs; entities' credit metrics may slip from their peaks.
- China's economic recovery will support coal demand, with power consumption reverting to normal growth this year.
- Government policies to increase coal output should bring supply and demand back into equilibrium; stringent long-term contract requirements will keep prices steady and predictable.
Government policies in China are set to flatten domestic coal prices in 2023. But thermal coal producers have some protection against the retreating prices and high costs, after strengthening their balance sheets last year. In addition, demand for coal is likely to remain strong, with prices locked into long-term contracts. S&P Global Ratings believes such support will further stabilize the producers.
To avert power shortages and outages, China continues to prioritize its energy security. A large part of this effort lies in stabilizing the coal market. The government is telling miners to commit a high portion of their output to long-term contracts with the power sector.
Coal will likely continue as the country's dominant power source for at least the next three to five years. This fuel presents the easiest path to energy security. This is based on China's vast coal reserves and coal remains the most affordable option for base-load power.
The post-COVID economic recovery will solidify downstream demand. China's economy is poised to rebound in 2023. We project the country's GDP to grow about 5% this year, compared with 3.0% in 2022, the preliminary figure from the government.
Power consumption will climb 6% this year, in our view. In 2022, when COVID lockdowns and a property slump hit use, power consumption rose just 3.6%. This was about half the average annual growth over the past decade.
Recovering power consumption will support coal demand. The fuel backed over 60% of the country's power generation in 2022 (see charts 1 and 2). While the country is moving toward decarbonization with increased use of renewable energy, coal will continue as the key baseload power source for the next three-five years at least.
Coal demand from other industries should be stable this year. The government has rolled out a batch of policies supporting the property sector, which is plausibly on track to recover in the second half of 2023 (see "China Property Is On The Cusp Of A Recovery," published Jan. 11, 2023). This would lift coal demand for correlated industries, such as cement and steel manufacturing, which rely on coal as an energy source. Sluggish demand in the U.S. and the eurozone may hit Chinese manufacturing in 2023, however (see "Asia-Pacific In 2023: China Rebound Cannot Offset Western Slowdown," Feb. 23, 2023).
Chart 1
Chart 2
The Chinese government's focus on energy security continues to ease supply tightness. Domestic production in China is likely to continue its upward trajectory in 2023, lifted by supportive government policies. Since energy security is its top priority, power plants can be sure of receiving coal supplies (see table 1 for details on policy updates).
We anticipate a ramp-up in coal production flowing from last year's targeted addition of 300 million tons in annual capacity. This coupled with likely higher energy demand post pandemic, will push coal miners to raise output this year (see chart 3).
The coal output expansion this year could moderate from 10% growth in 2022, in our view. This was the biggest production boost since China introduced supply-side reforms to the coal sector, in 2016 (see chart 4). Stricter and more extensive safety inspections on coal mines prompted by a recent fatal coal mine collapse in Inner Mongolia could impede this trend for supply easing.
While price caps on medium-to-long-term contracts may limit coal miners' windfall gains from high spot prices, the high portion of sales volume lock-ups in such contracts will protect miners from volatility on their cash flow and earnings.
| Table 1 | ||||||
| Policy Moves To Stabilize The Thermal Coal Market | ||||||
|---|---|---|---|---|---|---|
| How measures have evolved since 2022 | ||||||
| What remains unchanged? | What’s new? | |||||
| Medium-to-long-term contracts with power plants: | The National Development and Reform Commission (NDRC) has asked all coal miners to commit at least 80% of their coal output to long-term contracts. Coal miners should maintain 100% contract signing rate, and contract fulfillment rate. Coal miners should engage in medium and long-term contracts for all capacity added after September 2021. | The NDRC increased the medium to long-term thermal coal contract signing volume guidance to 2.9 billion tons in 2023, from 2.6 billion tons in 2022. There is an additional term requiring each coal producer to commit at least 75% of thermal coal resources to medium and long-term contract. | ||||
| Price cap: | The NDRC sets a "reasonable" price range of RMB570-RMB770 per ton for 5,500 kcal thermal coal handled at the Qinhuangdao Port, for medium and long-term contracts. The pricing mechanism includes a base price plus a floating range that is adjusted monthly based on the weighted average of coal price indexes. | The NDRC set the 2023 base price at RMB675 per ton for annual contracts for 5,500 kcal thermal coal, compared with RMB700 per ton in 2022. | ||||
| Note: The NDRC defines medium term and long term as any contract with a tenor of one year or above. NDRC--National Development and Reform Commission. RMB--Renminbi. kcal--Kilocalorie. Source: National Development and Reform Commission, State-owned Assets Supervision and Administration Commission. | ||||||
Chart 3
Chart 4
The return of Australian coal won't have much effect on the Chinese thermal coal market. The easing of an unofficial ban on Australian coal imports in early 2023 will not change the dominant position of domestic coal in the Chinese thermal coal market (see chart 5). Rising domestic production will ensure China has a low dependence on imports.
We don't expect a big increase in China's use of Australian thermal coal this year. Power companies mainly rely on domestic coal supplied under long-term contracts. This coal is cheaper than seaborne coal (see chart 6). In addition, the Australian government has introduced a plan requiring New South Wales coal miners to reserve a portion of thermal coal supply for local power plants. This may limit the flow of Australian coal to other markets.
Chart 5
Chart 6
Yankuang has capacity to handle falling prices and rising capex. Yankuang Energy Group Co. Ltd. (BB/Stable/--) has ample rating buffer to absorb possible falling prices in 2023 alongside continued high costs (see chart 7). High output will help the Chinese coal miner. We expect the company to produce more than 100 million tons this year following increased output at its Shaanxi and Inner Mongolia mines.
Its focus on thermal coal production will help the company to establish long-term supply contracts with power plants. Such contracts will give the firm high visibility on revenue and cash flow.
A robust performance in recent years has strengthened Yankuang's balance sheet. The firm's free operating cash flow will likely remain positive despite the company's enlarged capital expenditure (capex). Its operating cash flow should be sufficient to cover its capex over 2022-2024 (see chart 8).
The firm's capex will range from RMB17.0 billion-RMB18.0 billion each year over the period, in our view, substantially above the RMB10.4 billion spent in 2021. Funds will mainly be used to develop existing coal mines, expand coal chemical projects, and for investment in new energy businesses. Yankuang is aiming for installed capacity of over 10 million kilowatts of new energy power generation, and a hydrogen supply capacity of over 100,000 tons/year in five to 10 years.
Chart 7
Chart 8
China is having a moment of heightened ambivalence about coal. The energy shortages that cropped up in recent years have prompted the government to increase coal availability, to enhance energy security, in our view. However, Beijing remains committed to being fully carbon neutral by 2060. Policies are supportive of the coal sector now; down the road, they may be less so.
Related Research
- Asia-Pacific In 2023: China Rebound Cannot Offset Western Slowdown, Feb. 23, 2023
- Industry Top Trends 2023: Asia-Pacific Utilities, Feb. 2, 2023
- Industry Top Trends 2023: Metals and Mining, Jan. 23, 2023
- China Property Is On The Cusp Of A Recovery, Jan. 11, 2023
- China's Thermal Coal Miners: Credit Outlook Hinges On Government Policies, Energy Transition, Sept. 13, 2022
This report does not constitute a rating action.
| Primary Credit Analyst: | Crystal Wong, Hong Kong + 852 2533 3504; crystal.wong@spglobal.com |
| Secondary Contacts: | Annie Ao, Hong Kong +852 2533-3557; annie.ao@spglobal.com |
| Danny Huang, Hong Kong + 852 2532 8078; danny.huang@spglobal.com | |
| Research Assistant: | Mengwei Fan, Hong Kong |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.