China: A Potential Opportunity to Consolidate the Coal Industry

Consolidating the Chinese coal industry has long been one of Beijing's strategic industrial policy imperatives. But the government has struggled to achieve this imperative largely because high demand and high prices throughout the 2000s kept small coal operators profitable. They simply had no reason to relent to larger, state-owned coal conglomerates.

Now that the Chinese economy is slowing and demand for coal is declining, coal is becoming much cheaper. As a result, small-scale producers have had to curb output substantially. In fact, for the first time in a decade, Chinese coal production in the first six months of the year fell 3.7 percent, or by about 68 million metric tons, compared to the first six months of the previous year. The fact that production decreased in response to lowered demand could be a sign that market forces, which once constrained Beijing's consolidation efforts, are beginning to work in the government's favor. In the near term, falling output from private mines could create temporary supply disruptions and thus drive up Chinese imports.