China coal miners cut output as prices at 3-1/2 yr lows

SHANGHAI Mon May 6, 2013 4:00am EDT

SHANGHAI May 6 (Reuters) - Chinese coal miners are likely to cut output more to curb losses after a flood of cheap imports and higher hydro power output hit domestic demand in the world's top producer and consumer of the fuel, miners and traders said.

Smaller miners with higher costs were first to reduce output as the global coal market struggled to absorb abundant supplies, while bigger producers may be forced to follow suit. As the world's top importer, China's demand influences trade flows and prices worldwide.

Production from China's coal mines fell in March while imports rose. Output slid 5 million tonnes, or 1.7 percent from a year ago, to 290 million tonnes, the first year-on-year decline for a non-holiday month since October, data from the China Coal Transport and Distribution Association (CCTD) showed.

Coal imports in March grew over 20 percent on the year as utilities snapped up cheap Indonesian and Australian cargoes.

"Many of us are struggling with high stocks and weak sales," said the owner of a mine in Inner Mongolia with annual output of six million tonnes which has cut output by around 10 percent.

"Power plants are shopping around for bargains and are slow to put in orders. We should start to see more mines cut production over the next couple of months. Prices have fallen close to production costs and some higher-cost mines are already in the red."

Yanzhou Coal, which has one of the highest unit costs amongst its peers, said its Jan-March output of 14.9 million tonnes was down 2 percent from a year ago and down 11 percent from the previous quarter.

Thermal coal prices at the Australian port of Newcastle , a benchmark for Asia, were hovering near a five-month low on Friday at $87.20 a tonne. Prices have fallen 5.5 percent so far this year.

Slowing growth in the world's second-largest economy has undermined fuel demand assumptions and sent China's domestic coal prices to their lowest since October 2009 at 613 yuan ($99.22) a tonne.

China's economic growth in the first quarter slowed to 7.7 percent, below market expectations of 8 percent and down from 7.9 percent in the previous quarter. Total power generation grew much more slowly than the economy, at 2.9 percent on the year in the first quarter.

Recent heavy rain in China's southern region is also likely to boost hydro power output and further dent coal demand. Hydro power output typically peaks from May to August.

RISING COSTS, SWOLLEN STOCKS

China's thermal coal costs, including mine production and shipping, range between $80-$100 per tonne, with about 200 million tonnes out of annual output of over 3 billion tonnes costing $90-100 per tonne, according to brokerage CLSA.

That compares with costs of about $70-85 a tonne in Australia and $46-$55 a tonne in Indonesia and South Africa, according to Goldman Sachs.

Inner Mongolia, China's top coal producing province, accounts for roughly a third of the country's total coal output.

While extensive open-pit mining means the province has one of the lowest costs in the country, some 40 percent of the coal produced there relies on expensive trucking to get to market. The poorer coal grades produced in the region also fetch lower prices, further straining margins.

Mining in the other key coal provinces of Shanxi and Shaanxi has also become more expensive as pits run deeper and labour-intensive underground mines are forced to pay rising wages.

China's top coal miner Shenhua Energy Group aims to cut production costs by 5 percent in 2013 to cope with tougher market conditions, after costs rose 9.7 percent in 2012, domestic media reported Chairman Zhang Xiwu as saying.

The firm's first-quarter coal production grew just 1 percent from a year ago to 79.90 million tonnes, behind its guidance for an annual increase of 3.6 percent.

The move to cut output comes as miners are stuck with swelling piles of unsold stock. Inventories at mines rose to a seven-month high of 44.2 million tonnes by the end of March, up 14 percent from a year ago and equivalent to about two weeks of consumption, data from the coal association showed.

Inventories at six major power plants stood at 15.89 million tonnes on May 5, equivalent to 26 days of consumption, up 0.4 days from week ago.

While Chinese coal demand will continue to grow, the rate of growth is expected to slow and the share of the country's power output produced from coal is forecast to fall in the longer term as consumption of gas and renewable energy rises. (Editing by Simon Webb)