22 March 2015: Dramatic cuts projected by China Shenhua Energy Company (Shenhua) – China’s largest coal producer – should send shockwaves through the global coal markets, according to theInstitute for Energy Economics and Financial Analysis (IEEFA).

In announcing its 2014 results and its 2015 business targets, Shenhua predicts a 10% or 47Mt reduction to 404Mt in its domestic coal sales in 2015. Capex plans for coal and power in 2015 are down 25% on 2014 levels to US$3.2bn, while Shenhua’s investment in ports and rail are forecast to be down 12% year-on-year to US$2.5bn.

“As the top producer in China with a 15% market share, Shenhua is a key barometer for the Chinese coal market,” said Tim Buckley, IEEFA’s director of energy finance studies, Australasia. “This plan to reduce volumes a further 10% in 2015 sends an unmistakable signal that China is intent on cutting the emissions intensity of its energy mix by a rapid diversification away from coal.”

“While proponents of the view that coal is only in a cyclical downturn argue the 2.9% reduction in China’s coal consumption in 2014 was an anomaly, Shenhua’s own forecast provides more evidence that China has passed peak coal.”

With increasing pressure on Chinese coal companies, Shenhua’s average coal price received in 2014 dropped almost 10% yoy, with total coal volumes (own production and traded volumes combined) dropping 12.4% to 451Mt (with the decline accelerating rapidly in 4QCY2014).

However, unlike the majority of western-listed coal companies, which have seen profits and as a result share prices freefall, 2014 figures reveal Shenhua to be financially robust with only limited financial leverage. Shenhua produced coal at an average cash cost of coal product of Rmb110/t, giving it a gross profit margin of 69%, a rate steady on 2013 levels.

“Shenhua is a rare example of a coal company with a healthy balance sheet,” said Buckley. “The drop in production and sales is simply a result of it falling in line with Premier Li Keqiang’s recently announced plans to cut the country’s energy intensity by another 3.1% in 2015 (building on the 4.8% decline in 2014) and to cap coal use to below 65% of total primary energy consumption by 2017.”

Since the start of 2014, Chinese equity analysts have cut their consensus forecasts for the five top Chinese listed coal companies’ earnings in 2015 by 45% on average. Within this group, 2015 earnings expectations for Shenhua are down ‘only’ 20%, with China Coal down more than 60% and Shaanxi Coal down 55%.

In 2014, Shenhua also focused on cutting costs for domestic coal transportation. In September 2014, the company opened a new 180km, 200Mtpa capacity rail line. Moving coal by rail is half the cost of truck transportation.

“2014 saw a strategic shift by Shenhua to reduce volumes, operating costs and capital employed. This new downgrade for 2015 capex and production accelerates this plan,” said Buckley.

“The implications are unclear at this stage for the company’s Australian Watermark coal mine proposal on the Liverpool Plains. However, the significant cut in production and overall capex plans combines with a 40% year-on-year decline in China’s January-February 2015 coal imports to suggest the strategic rationale for this A$1bn greenfield expansion is likely to be reviewed in detail by the new management and Board that took the helm of Shenhua in mid 2014.”

Shenhua’s announcement comes at the same time as China’s top energy official, Nur Bekri, saying in comments published by the National Energy Administration that the country would aim to raise wind power capacity to 200 gigawatts (GW) and solar to around 100 GW by 2020, up from 95.8 GW and 26.5 GW respectively at the end of 2014.

In 2014 China’s coal consumption dropped by 2.9%, the first drop in over a decade. This is despite total electricity production increasing 3.8% and economic growth continuing at 7.4% growth in 2014.

“Without doubt, the greatest impact of China’s hastening shift to cleaner energy will be felt by the seaborne thermal coal sector. The message to investors is plain: this is a sector in structural decline,” said Buckley.

“Shenhua’s moves are the clearest signal yet and should make even the most bullish investors in coal take note. Over the past two years, coal has wiped out billions of dollars of shareholder value. It is becoming a major wealth destroyer and this trend is set to increase.”

While some analysts have suggested Shenhua is being excessively conservative in its coal sales projections for 2015, year-to-date production and sales figures suggest the contrary.

Shenhua’s coal sales year-to-date are in fact 47.4 million tonnes (Mt), down 32.1% year-on-year. In-house production by Shenhua is down 11.8% year on year to 46.2Mt while imports were down 100%. China Coal Energy Co, the second largest coal producer in China, likewise saw January 2015 coal sales down 13.1% year-on-year to 7.6Mt on in-house production of 7.1Mt, down 31.6% year-on-year.


About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce dependence on coal and other non-renewable energy resources.

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