August 20,2009

Shanxi's Coal Barons being "Reorganized" Out of the Industry

By CSC staff, Shanghai

In this year's first half, the GDP in Shanxi Province, China's capital of coal, showed negative growth of 4.4%, due mainly to the large-scale reorganization of its coal industry. In April, the provincial government declared that by the end of next year, more than 2,000 mining enterprises will have merged or been consolidated, involving capacity of more than 220 million tons.


The objects of this integration are the province's many small mines, accounting for more than 80% of the total. This also means that many of Shanxi's coal bosses will soon become history.


By the end of 2010, a total of 2012 coal mines across the province will have been acquired or reorganized, among which 1161 will go to five major state-owned coal groups and 693 to local state-owned coal enterprises, leaving only 479 mines independent.

One coal boss had wanted to convert his 30 thousand ton yield into shares of Lu Ning Coal Group, but changed his mind later. "Selling it avoids trouble" he said, for the reason that the units participating in the consolidation are all state-owned mines.


The government is requiring that small coal mines with single wells and production below 90 tons/year will be integrated into the Shanxi Province Coal Mine Group, the Shanxi Coal Transportation and Marketing Group, and the Shanxi Coal Import and Export Group Corporation.


The government has ordered that the acquiring enterprises will pay a premium to the previous owners of 50% or 100% as compensation. But many say it is nowhere near enough


"I'm being paid 17 million yuan for the 10 million tons. According to the policy, the compensation is only 25.5 million yuan. However, the added 8.5 million yuan does not offset the investment of tens of millions and even billions," a coal boss from Xiaoyi says. "If the policy will not change for 5 years, I am sure I would carry out the investment. However, the policy has changed three times in five years."


Managers of large state-owned mines expressed understanding and sympathy for the coal bosses. "After all they have invested so much. And if the investment came after 2007, it is certainly a loss to sell now after mine closings and the Olympics. However, state-owned assets could not pay the bill for the policy." A Datong Coal Group manager noted that coal bosses also know it is better for them to take what is offered now than to get nothing later.


For Ningwu County, since the consolidation or closing of small coal mines, local fiscal revenue has come up short, and many units are unable to pay salaries. Ningwu plans to integrate five among its 22 small coal mines into a local coal group to protect the county's interests.


In the first half year, coal mines in Datong areas produced 2.83 million tons of raw coal, down 60%, year-on-year. In the first five months, fiscal revenues in Datong area fell 14.63%, year-on-year, while in the first six months, they dropped 6.28%, year-on-year. Coal has contributed 70-80% of local fiscal revenues.


Shanxi's GDP fell 4.4% in the first six months, year-on-year, and in the first quarter, GDP even showed negative growth of 8%. Shanxi is currently readjusting its industrial structure and integrating resources. The reorganization or closing of coal enterprises is an important cause for the economic dip.


In the first quarter of this year, the coal production in the Inner Mongolia Autonomous Region passed that of Shanxi, taking the Number One position. Now only one quarter of Shanxi's coal enterprises are under normal operation, throwing market share to Inner Mongolia. In addition, rail transportation in Inner Mongolia has been eased. In the first six months, the autonomous region produced 160 billion tons of coal, up 42.31 billion tons, year-on-year. It is expected that its coal production will continue to exceed Shanxi's this year and remain first across the country.


Shanxi's stalling GDP also reflects the risk of putting most of one's economic eggs into one industrial basket. Coal revenues account for 70% of the province's GDP. The added value of heavy industry accounts for 95% of its industrial output while industries such as electricity, coke, and metallurgy are over concentrated.


Some coal bosses are withdrawing from the coke field. Zhang Xinming, head of Shanxi Jinye Coal & Coking Group, has transferred many enterprises under his group to Datong Coal Group. It is estimated that the involved capital is about 4 billion yuan. Zhang's family ranks first in the energy field in Shanxi.


After the integration of thousands of mines, the huge capital piles that emerge may flow out of the province and into other industries, a prospect the province finds unpleasant.


Provincial officials are trying to find new ways to help these coal bosses keep their money in Shanxi. From 2009 to 2010, a government-controlled investment project of 650 billion yuan will be open to private capital, directing investment in infrastructure such as roads, railways, bridges, urban construction, environmental protection, and municipal areas such as public transportation and gas utilities. The government will provide preferential policies in nine areas such as land supply, financial support, and tax reduction.


Prior to this, some coal bosses in Luliang, Shuozhou, Linfen, and Changzhi have entered the breeding industry or tourism. The government is worried that large sums of freed up money will enter go to real estate, boosting existing bubbles. Shanxi coal bosses are known across the country for their Hummers and luxury flats in Beijing.

The policies Shanxi Province is introducing to direct private capital to infrastructure and public services investment include PPP (public-private partnerships), BT (build-transfer), BOT (build-operate-transfer), and TOT (transfer-operate-transfer). It is not know, however, whether conservative coal bosses will enter these fields.


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