China has approved the merger of two of Shandong province’s top state-owned coal miners, Shandong Energy Group and Yankuang Group, a decision that effectively creates a new major company in the world’s top producer and consumer of the fossil fuel.
The combined company, China’s second-largest coal producer after China Energy Investment Corporation (CEIC), will operate under the name Shandong Energy Group.
It is expected to account for close to 7% of the country’s total coal output.
Gewin Ho, a Moody’s vice president and senior credit officer, said that because the combined group will derive most of its businesses from coal mining, its credit profile will remain constrained by significant carbon transition risk and by its exposure to coal-price volatility.
“While support from the Shandong Provincial Government should remain forthcoming, it will be constrained by the predominantly commercial and competitive businesses of the combined group,” Ho said in a July note to investors.
The merger of Yankuang and Shandong Energy comes as China forges ahead with the reform of its stated-owned enterprises. The newly merged company will further increase its competitiveness on the market as it will have a whole industrial chain integrating coal production, coal-fired power plants and coal chemicals, International Energy Agency’s analysts said in July.
Other Chinese coal-producing provinces are pushing for similar consolidations to improve efficiency. The government of Shanxi, the country’s second biggest coal-producing province, approved earlier this year the merger of state-controlled producers Shanxi Coal Import Export and Shanxi Coking Coal.
Despite global efforts to abandon the use of coal, the most polluting fuel, China has continued to rely on the ubiquitous and low-cost commodity. This has put coal in a dominant position in the country’s power sector, accounting for almost 58% of the nation’s energy use last year.
Coal plants, which burn close to 54% of all coal used in the country, provide 52% of generating capacity and 66% of electricity output — down from a peak of 81% in 2007.
China will adopt next year its 14th five-year-plan, which will provide a roadmap for the country’s political and economic priorities through 2025.
State-run National Center for Climate Change Strategy has advocated for that plan to include hard caps on carbon emissions. Premier Li Keqiang, director of the National Energy Commission, which determines China’s energy policy, has a different idea.
Last year, he spoke of the need to “promote the safe and green mining of coal and the clean and efficient development of coal power.”