China Makes Environmental Case for Increasing Big Coal’s Clout

China Makes Environmental Case for Increasing Big Coal’s Clout

Beijing Wants State-Owned Giants to Manage Industry’s Development, Environmental Consequences

CHUIN-WEI YAP

Updated Nov. 28, 2013 8:08 a.m. ET

BEIJING—China is moving to increase the clout of its state-owned coal giants, as it seeks to clean up a sprawling and heavily polluting industry that is nevertheless crucial to its energy needs. In a policy proposal unveiled Thursday, the State Council, China’s cabinet, said it wants big corporate champions to manage the economic development and environmental consequences of the industry, which also has a slew of smaller operators.The government said it would “encourage the consolidation of coal companies, with large-scale companies as the main body, building large-scale modern coal mines within large-scale coal bases.”

Analysts said the proposal also puts the industry more firmly under the control of Beijing. The new measures “protect state-owned enterprises as much as they protect the environment,” said North Square Blue Oak energy analyst Miao Tian.

In helping state-owned giants to assert their position in the industry, Beijing may be conceding it can’t cut its reliance on coal as fast as it had hoped. China uses nearly as much coal as the rest of the world combined—3.5 billion tons last year, according to the China Coal Industry Association, and likely headed for 4.8 billion tons by 2020.

In September Beijing pledged to cut coal’s portion of the country’s energy mix to “less than 65%” by 2017, from 70% now; earlier State Council documents set a goal for 2020 of about 60%.

Seeking to contain the environmental fallout from decades of breakneck development, China in recent years has exiled coal-burning steel mills outside city limits and sped measures to roll back air pollution.

Though the statement didn’t mention safety, Chinese officials in recent years have cited a raft of industrial accidents as one reason to consolidate the industry. The country has the world’s most lethal coal mines, with 1,384 fatalities recorded last year. Independent watchdogs and Beijing say state-owned company’s safety standards are generally much more stringent than those of smaller privately held operations.

China’s largest coal companies— China Shenhua Energy Co. 601088.SH -0.35% Ltd., China National Coal Group Corp. and Yanzhou Coal Mining

Co. 600188.SH -0.67% —didn’t respond to calls for comment on Thursday.

“Coal is China’s main energy source and important industry material, and its coal industry still has relatively large room for development,” said Liang Jiakun, deputy chairman of the China Coal Industry Association, a state-backed body representing the country’s coal businesses.

The State Council also gave Beijing’s top economic-planning agencies until the end of the year to clean up a “haphazard” system of local-government levies on coal companies. “These various kinds of levies typically account for 25% to 35% of (coal) businesses’ revenues,” it said. “These illegal charges increase the burden on enterprises, and also damage the image of government.”

Ms. Miao of North Square said China has more than 88 fees and 21 taxes related to coal production—nearly three times as many as apply to manufacturing.

Local government revenues and smaller miners will bear the brunt of reform. The government on Thursday reiterated long-standing vows to disallow new coal projects producing less than 300,000 metric tons a year. It will also gradually shut down mines whose annual production is 90,000 tons or less.

China’s coal industry—like most of its industrial sectors—is already dominated by giant state-owned producers. State-owned mines account for slightly more than 60% of total production capacity, said Dai Bing, analyst with the Coal Network consulting firm.

Over the years, though, smaller mines have proved nimble at surviving central-government attempts to weed them out. “It’s not easy to govern this aspect as some localities don’t have any other means of financial survival, so they will not strictly enforce the rules on small-scale coal producers,” Mr. Dai said.

Coal imports in the first 10 months of 2013 were up 19% from a year earlier, to 216 million tons, customs data showed. Much of it was low-grade polluting coal, leading the State Council on Thursday to say it would explore using “differentiated tariffs” to encourage the import of high-quality coal. It said it would also ban imports of high-ash, high-sulfur coal. In August, the government reinstated a 3% import tariff on lignite, a highly polluting form of coal.