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This $4.3 Billion Warning Sign Is Flashing In China’s Coal Business

Peabody coal

Coal has been one of the big stories of 2016. With this beat-down market taking flight during the last half of the year — lifting stocks of major producers like Peabody Energy to over 700% gains in a matter of weeks. Check out the chart below.

(Click to enlarge)

A late rebound in the coal market this year lifted Peabody Energy from below $2 per share to over $16 very quickly

And news this week suggests things could be looking up further for international producers in this market. With problems apparently mounting in the world’s largest producing nation: China.

Chinese coal miners are still struggling under the burden of lower global prices. Which this week forced major lender Industrial and Commercial Bank of China (ICBC) to step in and bail out two big producers.

That was Datong Coal Mine Group and Yangquan Coal Industry. Which ICBC said Monday will receive debt-for-equity swaps from the bank — allowing the coal miners to take loans off their books in exchange for issuing shares to ICBC.

This basically amounts to a government handout designed to keep these coal players going. And the amounts involved are reportedly very significant — with sources telling Reuters that the two bailouts, plus an additional debt-for-equity swap with steelmaker Taiyuan Iron & Steel, total $4.3 billion.

That suggests China’s coal firms are laboring under very intense financial burdens. And not all companies are getting bailouts — with another big Chinese coal player this week defaulting on bond payments due to balance-sheet stress.

That’s state-owned Sichuan Coal Industry Group — the largest coal producer in Sichuan province. Which failed to repay principal and interest on bonds due December 25, according to reports emerging yesterday.

Related: Has The OPEC Rally Gone Too Far?

The missed payment marks the second time Sichuan Coal has defaulted this year — after the company also missed bond payments due in June. On that occasion local government banks eventually stepped in and paid bondholders. But so far, no such intervention has emerged for this latest default.

All of which suggests that China’s coal miners could see production plateau or even fall as they struggle with limited funds to cover capital and operating costs this coming year — even with financial help from the government. Watch for more defaults in 2017 (with a total $770 billion in corporate bonds estimated to be maturing this year across China), and for ensuing effects on coal production.

Here’s to a lump of coal,

By Dave Forest

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