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China's Shanxi province, a major coal-producing region, has ordered coal miners to limit production to address safety concerns and overproduction. This decision, announced by provincial authorities, has led to a surge in coking coal futures on Wednesday.
According to the notice issued recently by the provincial emergency management, mine safety, and energy bureaus, coal miners in Shanxi are required to reduce output and conduct safety checks from March to May. Shanxi is responsible for 29% of China's coal supply, including thermal coal used in power plants and coking coal essential for steelmaking.
China Futures, a brokerage firm, estimated that the order could reduce supply by 5 to 6 MMT for two major producers, Shanxi Coal International Energy Group and Shanxi Luan Group. However, officials from these companies were not available for immediate comment.
The impact of the order is not limited to these two companies, which has raised concerns in the market, according to analysts at China Futures.
The most active coking coal futures contract on the Dalian Exchange, a key benchmark in China, surged by up to 8% on expectations of tighter supply, ultimately closing up 6.19%, marking the highest close since Jan. 31.
The decision is partly aimed at reducing mine accidents resulting from overproduction. "In the past several years, most miners in China were operating at full capacity, leading to many small-scale accidents," explained Liu Shaoyi, a coal trader based in Xiamen.
The China Coal Industry Association reported a 53% increase in accidents in 2023 compared to the previous year. This prompted China's cabinet to announce increased safety checks.
China's coal output reached a record high of 4.66 bn tonnes last year, with approximately 1.36 bn tonnes coming from Shanxi, according to data from the statistics bureau.
The current move by Shanxi province reflects efforts to manage coal production safety issues without causing a significant increase in coal prices, as domestic and international coal supplies are deemed sufficient for now.
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