Merg­ers may hold the key in coal sec­tor

Min­ing firms in key prov­ince strug­gle de­spite re­bound in com­mod­ity prices

China Daily (Hong Kong) - - FRONT PAGE - By MENG FANBIN meng­fan­bin@chi­nadaily.com.cn

Merg­ers or re­struc­tur­ing will dom­i­nate the coal in­dus­try in the north­ern prov­ince of Shanxi after three ma­jor min­ing groups re­ported first-quar­ter losses, in­dus­try in­sid­ers said.

Out of the seven lead­ing com­pa­nies in the sec­tor, Da­tong Coal Mine Group, Lu’an Group and Shanxi Cok­ing Coal Group have strug­gled to bal­ance their books, de­spite the re­bound in coal prices.

In­dus­try in­sid­ers now ex­pect a series of merg­ers or re­struc­tur­ing to solve debt prob­lems that are “ex­tremely high” in these key play­ers.

“Debt as­set ra­tios of the three groups are up to 70 to 80 per­cent,” said Zhang Min, an an­a­lyst from Sub­lime China In­for­ma­tion Group.

“They have bor­rowed a large amount of money from banks and other lenders to di­ver­sify their op­er­a­tions, not only dur­ing the down­turn pe­riod (2010-15), but also dur­ing the pros­per­ous time (2000-09).”

The prob­lem, ac­cord­ing to Zhang, is that Shanxi’s coal gi­ants are in­volved in too many other busi­nesses, such as the coal-to-chem­i­cal sec­tor and the real es­tate in­dus­try, as well as tourism and agri­cul­ture.

“This has caused prob­lems be­cause they have high in­ter­est pay­ments (after bor­row­ing from banks to buy new ac­qui­si­tions) ev­ery month, which leads to higher costs,” she said.

Shanxi is the largest coal pro­duc- ing prov­ince in China, but the in­dus­try badly needs to re­form.

The lo­cal gov­ern­ment called on State-owned en­ter­prises, or SOEs, in the min­ing sec­tor to re­port on their main busi­ness ac­tiv­i­ties by Fri­day, so strate­gic and de­vel­op­ment goals can be es­tab­lished at these sprawl­ing com­pa­nies.

This fol­lowed a de­ci­sion by Shanxi’s lo­cal gov­ern­ment to pub­lish a “guid­ance on deep­en­ing re­form of State-owned en­ter­prises and as­sets” in the prov­ince last month.

By 2020, the doc­u­ment stated that SOEs should be trans­formed into high-end com­pa­nies, while tra­di­tional in­dus­tries should be re­or­ga­nized through re­struc­tur­ing and merg­ers to op­ti­mize re­sources.

In­dus­try an­a­lysts pointed out in the Se­cu­ri­ties Daily that these moves prove that in­te­gra­tion of the coal sec­tor in Shanxi is ac­cel­er­at­ing.

“But the over­all process will not be quick be­cause it spans too many busi­nesses and sev­eral dif­fer­ent groups,” said Zhang at Sub­lime China In­for­ma­tion Group. “The ne­go­ti­a­tions will take a long time.”

Fig­ures showed Da­tong Coal Mine Group re­ported op­er­at­ing rev­enue of 37.8 bil­lion yuan ($5.5 bil­lion) and a loss of 291 mil­lion yuan in the first three months.

Dur­ing the same pe­riod, Lu’an Group made a loss of 14 mil­lion yuan, while Shanxi Cok­ing Coal Group also slipped into the red with­out re­leas­ing de­tailed fi­nan­cial fig­ures

China’s coal sec­tor achieved con­tin­ued prof­its in the first five months of this year, com­pared with losses in the same pe­riod last year, ac­cord­ing to data from the Min­istry of Fi­nance.

Debt as­set ra­tios of the three groups are up to 70 to 80%.” Zhang Min, an an­a­lyst from Sub­lime China In­for­ma­tion Group

XIE ZHENGYI / FOR CHINA DAILY

A worker uploads coal at a rail­road yard in Huaibei, An­hui prov­ince.

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