China’s $10 Billion Coal Trusts at Risk
Once enjoying double digit profits, peaking at above 15 percent in 2008, China’s 2.9 trillion yuan (US$500 billion) coal industry is now feeling the chill of a shrinking market despite a record excess of coal stockpiles. Mining trusts, as a result, are facing increasingly gloomy prospects.
China’s mining trusts prospered between 2010 and 2011, following a wave of consolidations in the coal industry. Tightened regulations on real estate investment also drove cash into the equally profitable mining industry, according to the China Security Journal. In 2011 alone, China’s mining trusts rose by 162 percent in number, and 254 percent in volume.
But the situation took a dramatic turn in mid-2012, when excess coal stockpiles, slow sales, and plummeting coal prices plagued the industry. By the end of the year, firms held an unprecedented 344 million tons of excess coal stocks.
This year, the industry’s total production capacity is projected to outstrip demand by 500 million tons, according to China Mining and Energy Network, a website run by state energy authorities.
As a result, the combined gross and net profits of the 39 public companies in China’s coal industry fell to a five-year-low in 2012, with 33 companies reporting negative profit growths.
“The slump in the coal industry has affected many other industries, including coal-related trust products,” Ms. Yuan from China’s CITIC Trust told The Epoch Times. “If the coal industry goes downhill, the companies [in this industry] are very likely to end up defaulting,” she said.
And any decision to default could be disastrous. About 70 trusts are due to pay dividends by the end of this year. Most of the trusts rely on coal mines as collateral. But plummeting coal prices could leave the mines far below their mortgage values, meaning investors could be left with little remuneration if the trusts are to default.
Given the rising risks faced by mining-related trusts, China’s financial regulators are now paying close attention to risk-management measures for the 140 billion yuan (US$22.8 billion) trust market, according to the Chinese paper, Securities Daily.
Coal is not the only commodity piling up in China. In August 2012, Zhang Hongxia, chairman of China’s largest cotton textile maker, told Bloomberg in an interview that the Chinese economy is only at the beginning of a harsh winter. “China now is facing a situation where everything from coal to steel inventories are piling up.”
Translated by Pingping Yu. Written in English by Tan Shu Yan.
Read the original Chinese article.