How much longer before outdated production capacity is phased out?

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With the current downturn in the coal industry, there won’t be much time for outdated production capacities to withdraw from the market. Those outdated capacities that choose to go into dormancy may not see a revival any time soon. Since 2012, the coal market has been on a downward trend, and this is now the fourth year in a row. Except for a few companies such as Shenhua Group, the coal industry is suffering heavy losses, with over 80% of enterprises in the red. At these current prices, for the coal shipped to the Bohai Sea by some large coal companies in Inner Mongolia, even if they have a cost advantage, there is little profit left. The coal industry is facing increasingly difficult circumstances; it seems to have reached its lowest point, with the coal production capacity that is in desperate need of demand hoping for a turnaround in the market situation. Future demand allows the coal industry to be optimistic. It is widely agreed that around 2020, domestic coal demand will reach its peak, at around 4.5 billion tons. Such forecast results reflect coal’s dominant role as an energy source, reinforcing confidence in the industry’s prospects. However, it should be recognized that high demand does not necessarily mean a rapid reversal of the market, nor does it guarantee that the industry will achieve reasonable profits. It depends on what the supply side decides. The fact is that due to increased investment, especially during the 11th Five-Year Plan period, statistics show that investment in coal mine construction reached 1.25 trillion yuan, which is 2.6 times the total amount invested in the previous 55 years; this has led to an imbalance between supply and demand for coal in recent years. At present, an actual production capacity of over 4 billion tons, coupled with another 1 billion tons of capacity that will be gradually brought online, has left the coal market in a state of silence. When the market will turn from crisis to recovery depends crucially on the progress in phasing out outdated production capacity. Phasing out outdated production capacity is inherently a difficult and lengthy process. This is even more true in industries with excessive competition due to the natural homogeneity of products like coal. Through fierce competition driven primarily by falling prices, some outdated production capacities choose to go into dormancy, while others opt to buy time in order to withdraw from the market. That is precisely the situation at present: some large enterprises have stopped operating unprofitable mines and mining faces, and are adopting centralized production methods ； Some small coal mines that are easy to shut down “request to be merged,” or the mines are closed and the workers leave. It is worth noting that this downturn in the coal industry will not provide much time for outdated production capacities to withdraw from the market; those outdated capacities that choose to go into dormancy may not see a revival any time soon. First, policies have raised the barriers to entry for this industry. Safety, environmental protection, and large-scale production have become mandatory policy requirements, which are effectively driving out those production capacities that lack safety guarantees, fail to meet environmental standards, and are not operated on a large scale. Some outdated production capacities, which attempt to return to the policy framework through investment and renovation, no longer possess investment efficiency. Secondly, the advantage of newly added production capacity is prominent. With 1 billion tons of new production capacity under construction, it was born under new industrial policies and grows in an environment characterized by technological innovation and improvements in production and management models; it thus possesses inherent advantages and greater vitality. When competing with such capabilities, outdated production capacities are undoubtedly like eggs trying to hit a rock. Thirdly, changes in the market ecosystem are putting even greater pressure on the survival space of outdated production capacities. “Initiatives such as the development of river channels for transporting coal, ultra-high voltage transmission systems, and large-scale transportation networks, as well as the transport of coal from the north to the south, electricity from the north to the south, and electricity from the west to the east, have led to a competitive environment in the coal market that is as open and transparent as that of the Internet. Changes in product formats and the collapse of regional barriers are squeezing the operational space for outdated production capacities even more tightly. Sichuan, Chongqing, Hunan, Guizhou and other places are the most typical. Fourth, imported coal is also strong. Whether the coal comes by train from the north or by sea from the south, domestic coal does not have an absolute advantage that would prevent it from entering the country. Fifth, the development of renewable energy may outpace what many people expect. Especially in the photovoltaic industry, frequent technological breakthroughs have led to a dramatic drop in the cost of photovoltaic power generation, posing a serious challenge to coal-fired power generation, which is already economically viable. Renewable energy will not arrive like a storm, despite many predictions to the contrary; the coal industry must also adopt a bottom-line mindset and enhance its flexibility and adaptability to changes in the energy structure. Is there another possibility: another round of rapid economic growth, a kind of \"flood-like\" stimulus, that would allow underperforming production capacities to get through difficult times and experience improvement? Not only coal, but excess steel, cement, and so on surely have similar expectations. Dialectically speaking, it cannot be said to be completely impossible. However, the prevailing view is that the Chinese economy is entering a phase of medium-to-high speed growth; in fact, the GDP growth rate has already dropped to around 7%. Is such an expectation a reality that is approaching, or is it merely wishful thinking? Undoubtedly, the latter possibility is greater. Amidst the hesitation over whether to retain or phase out outdated production capacity, the coal market has been in a downward trend for the fourth year now. The time available for outdated production capacity to be phased out is running out by the second.