China’s latest mine collapse could cut coal capacity by 100mtpa

On 12th January, a roof collapse at Lijiagou coal mine in Shenmu county in Shaanxi province killed 21 miners. The mine, with a capacity of 0.9 Mtpa, is owned by Baiji Mining Company and had just been approved in May 2018 by the provincial work safety bureau as a grade 2 mine, the second-highest standard in China’s mine safety rating system.

We understand that all privately owned mines in Shenmu county were forced to suspend operations the day after the accident. We have also heard that mines in adjacent Fugu county – another large coal mining area – may also be subject to suspensions.

As such, we estimate 50 Mtpa of production capacity will be impacted by operations halting at private mines in Shenmu. This could double to 100 Mtpa if the mines in Fugu also face suspensions. We do not know how long the suspensions will last, but is likely to be for at least one month.

Coal prices in Shenmu and Fugu have increased by RMB10-50/t since the accident. The price for Qinhuangdao 5500, which had been on a downward trajectory in the week prior to the accident, also stopped falling on 14 January, the first day of trading after the accident.

Implications: 

The accident will have a greater impact on the market after the Chinese new year

Although production has been suspended in the region, it will barely worry the market before the holiday period, which is only three weeks away. Private mines typically stop operating one week before the national holiday. We estimate that mines suspending operation two weeks earlier than normal will lead to a 5 Mt reduction in supply. This will have little impact on the Qinhuangdao price in the run-up to the Chinese new year, as falling demand and high inventories will mean buying activity slows down.

However, we believe the reduced supply will have an impact on the coal market after the holiday period. The mine where the accident took place only received its grade 2 safety rating in May 2018 – suggesting flaws in the rating process. Authorities in Shaanxi have announced they will implement safety checks across the province following the accident. Almost a week earlier, the National Coal Mine Safety Administration had announced the inspection criteria for mines wishing to restart operation. We believe these new safety checks and the mine restart process after the holiday will be stricter than before – in Shaanxi province at least. This will mean supply will be reduced as demand increases after the holiday for restocking.

Production capacity by mine type and by location, Mt

With stricter checks expected, we believe the Qinhuangdao price won’t fall before the Chinese new year, and could even see an increase. However, as spot coal trading volumes are close to zero, any change in price will have little effect on the market.

Coal output in Shaanxi province could be affected throughout 2019 

The National Development and Reform Commission states Shaanxi province’s legal production capacity is 499 Mtpa. However, the province produced 568 Mt in the first 11 months of 2018, according to China’s National Bureau of Statistics. As such, we believe some output came from illegal mines or from legal mines exceeding their approved capacity. It is now possible that Shaanxi will implement the strictest-ever regulations on illegal production, which would significantly reduce output in the province for the year. However, metallurgical coal supply will hardly be affected as the Shenmu region mainly produces thermal coal.

If stricter checks are extended to other provinces, domestic supply could tighten from its currently relaxed situation, helping coal imports as a result.