* Coal price falls mean tough times for Chinese producers
* Inner Mongolia mines bearing brunt of pain
* Fears of further closures, wages being slashed
By Fayen Wong
ORDOS, China, April 2 The Baofu highway, a road
that serves the mines in China's coal-producing hub of Ordos,
was largely empty on a recent visit. A few years ago, it was so
clogged with trucks that the traffic jams were legendary,
sometimes lasting several days.
To either side, rows of once busy restaurants are closed,
and flanked by advertisements for discounted coal. At mines that
are still operating, unsold coal is piled high and lacking its
black sheen, having been exposed to the elements for months.
China's top producing coal province of Inner Mongolia, where
Ordos is located, is in crisis.
Tumbling prices, caused by weaker demand due to slowing
growth in China and a flood of cheaper imports, have forced many
smaller miners out of business, while some major firms are
slashing wages by up to 50 percent to stem heavy losses.
Chinese coal prices are at 6-year lows, and miners in Inner
Mongolia and elsewhere are grappling with overcapacity, sluggish
demand and shrinking bank credit, industry experts said.
The troubles faced by small miners in the region are likely
to be replicated across China's coal industry, posing a risk for
China's financial health if there is a wave of bankruptcies.
Weng Qing An, chief financial officer at China Coal Energy
, the country's No. 2 producer, said the
outlook for miners across China was grim.
"If coal prices continue to slide, it will be hard for many
companies to survive. The whole industry will undergo a major
consolidation," he told a recent results briefing in Hong Kong.
BEARING THE BRUNT
Miners in the land-locked northern province of Inner
Mongolia are bearing the brunt of the slump because they are far
from coastal buyers. Many are also a long way from railways and
ports, forcing them to rely on expensive trucking for delivery.
In the Ordos mining district - which accounted for a fifth
of China's coal output at its peak in 2012 - about half of the
20 private mines visited by Reuters last month were shut, rows
of coal excavators and trucks locked away in their yards.
It is not clear how many mines have gone out of business, or
shut down temporarily, but veteran coal traders said a further
drop in prices could force more than a tenth of about 300 mines
in Ordos to fold.
"The bigger ones can stomach the losses to maintain market
share, but those without financial muscle have stopped
production," said Li Ji, a coal analyst at Galaxy Futures, a
brokerage in Beijing.
China Coal's Weng said a third of the medium- to large-scale
miners in China were already incurring losses after a 16 percent
drop in prices last year.
Of 32 Chinese coal companies listed on Reuters Starmine,
nine had a default probability of between 2-4 percent within the
year, much higher than the average default probability of 0.38
percent for all companies listed on the mainland.
The coal firms' cash-to-short-term debt ratio had also
fallen to below 1 for the first time in at least 7-1/2 years, as
of Sept. 30, suggesting a lack of cash to cover debts maturing
within a year.
PAY CUTS AND DEBT STRESS
In a bid to reduce costs, some of the biggest Inner Mongolia
miners have cut salaries by 20-50 percent, company sources said.
Some employees at Inner Mongolia Mengtai Coal and Power Co.
have taken a 50 percent pay cut since late last year, sources at
the firm told Reuters.
Inner Mongolia Yitai Coal , which
reported a 48 percent drop in 2013 net profit, has also reduced
salaries for some workers since the start of 2014, company
Neither company responded to requests for comment.
After a 16 percent drop in 2013, spot prices at the top
Qinhuangdao port have shed another 15 percent since the start of
the year to 525 yuan ($85.93) a tonne, lower than 2008 levels
when prices were first published. Prices rose above 900 yuan in
2008, sparking a rush of mine expansions and new developments.
Li of Galaxy Futures estimated that miners in Inner Mongolia
could be losing at least 20-30 yuan for each tonne of coal they
Inner Mongolia's 2013 coal output rose 0.7 percent to 1.03
billion tonnes, accounting for about 30 percent of China's
total, driven by major producers who benefit from lower costs.
SHADOW BANKING WOES
Besides traditional banks, coal miners in Inner Mongolia and
beyond have relied heavily on China's shadow banks - an
unregulated sector made up of private lenders, trust companies
and corporate bond issuers - to fund a recent expansion spree.
With banks acting as sales agents for the high-yield
products offered by shadow banks, major lenders risk severe
losses if weak corporate borrowers default.
In February, state media said six Chinese trust firms had
lent $824.6 million to a delinquent coal company. Investors in
one product vowed to seek repayment not only from the trust
firm, but from the country's No. 2 bank, China Construction Bank
, which had sold them.
While the fire sale of luxury cars and homes was a common
way for coal bosses to raise cash last year in Inner Mongolia,
the near year-long price slump has forced some shadow lenders to
seize mines after owners defaulted on payments.
"Some companies pledged their mines to us as collateral.
After owing us payments for months, we have no choice but to
take over the mines to try to recover our money," said an
official at a Chinese trust company who declined to be
identified due to worries about bad publicity.
"With such a dire market outlook, who knows if we can even
get our money back?"
His firm was charging an annual interest rate of 30 percent
for loans compared to at least 10 percent at the major banks,
and recently seized two small mines in Inner Mongolia with an
annual production capacity of about 3 million tonnes, the
Still, industry turmoil may prove the catalyst for the
consolidation the bloated sector badly needs, experts said.
Any consolidation would have little direct impact on Chinese
pollution, as almost all mine sites in China already meet strict
requirements on containing coal dust.
China's coal output rose 0.8 percent last year. But with
bulging inventories at mines and ports, analysts said output
needs to fall for the market to return to balance.
"This is the bitter medicine the sector needs. Too many have
been blindly expanding for too long and the market is awash with
coal," said a veteran coal trader in Guangzhou, capital of
China's southern Guangdong province.
($1 = 6.2094 Chinese Yuan)
(Additional reporting by Charlie Zhu in HONG KONG and Patturaja
Murugaboopathy in BANGALORE; Editing by Mike Collett-White)