Rising stockpiles of coal and falling stock prices for producers may be signs of shifts in China's economic and energy policies.
Inventories at China's northern Qinhuangdao coal port climbed to a 10-month high of over 8 million metric tons in early February, the China Coal Transportation and Distribution Association said, according to state media.
Stockpiles at the four major coal ports in northern Hebei province and Tianjin municipality reached 22 million tons, the official English-language China Daily said.
The mountains of coal bear witness to both temporary conditions and longer-term trends as slower economic growth and anti-smog efforts combine to curb demand for the high-polluting fuel.
At the same time, coal prices have been dropping sharply, threatening producers and investors with loan defaults. The chain reaction has raised concerns for the entire system of shadow banking, which has shored up mine operators with high- interest unregulated loans.
"There are 10,000 producers in China. A lot of them are taking on debt," said Laban Yu, a Jefferies Group analyst in Hong Kong, cited by Bloomberg News. "It gets harder and harder to service debts when coal prices keep falling."
News of the first technical loan default broke on Feb. 12 after miner Shanxi Liansheng Energy Co. failed to make payments to clients of China Construction Bank on a high-yield debt instrument for 289 million yuan (U.S. $47.7 million), Shanghai Securities News and Reuters said.
Liansheng's high-flying owner, Xing Libin, is notorious for spending over $11 million (70 million yuan in 2012) on his daughter's wedding, according to the Financial Times.
But aside from incidents of extravagance, there are suggestions that the entire coal industry could be on the ropes.
The China National Coal Association (CNCA) reported industry losses of 40.55 billion yuan (U.S. $6.7 billion) for the first 11 months of 2013.
Despite a brief run-up before winter, coal prices fell 16 percent last year, Bloomberg said. Consumption rose 2.6 percent to 3.6 billion tons, according to CNCA.
This year, stockpiles have been driven higher from at least two sides as economic growth slows and the government targets overcapacity in coal-consuming industries that thicken urban smog.
In a Feb. 12 statement, China's State Council, or cabinet, said "overall consumption of coal should be controlled" after the density of smog-forming particles in 74 monitored cities soared 55.7 percent in December, the official Xinhua news agency reported without specifying the period for comparison.
The government's goal, announced in September, is to cut the share of coal in China's primary energy mix to less than 65 percent in 2017 from 66.8 percent in 2012, but it is unclear how much the reduction will help.
Wang Tao, resident scholar in the energy and climate program at the Carnegie-Tsinghua Center for Global Policy in Beijing, said the slowdown is likely the main reason for the recent rise in stockpiles, since the effects of the government's anti-smog plan are still at an early stage.
"Increasingly over the next year, we will see more of that impact from the change in preference for fossil fuel," said Wang in an interview.
Wang noted several factors that are likely to keep coal in surplus, including the switch to gas-fired power in major cities and cuts in excess production capacity among coal-consuming industries like steel.
"I have no doubt that increasingly over time that this will be a more important trend," he said.
But the effect of lower coal prices could complicate efforts to fight air pollution, since cheaper coal has been a bargain for power producers.
Last year, the combined profits of the big five state-owned power companies hit an 11-year high of 74 billion yuan (U.S. $12.2 billion), thanks to falling coal prices, China Daily said.
If the government pursues its campaign against overcapacity industries like steel and cement, it could free up even more coal, driving prices down even further and making it even more attractive to generating companies despite the consequences for smog.
Reports have cited industry resistance as a reason for the State Council's announcement on Feb. 12 that it will establish a special fund of 10 billion yuan (U.S. $1.65 billion) "to reward efforts to curb air pollution in the key areas."
"The announcement of the financial incentives revealed how difficult it has been for some leaders in Beijing to get many Chinese companies and government officials to comply with environmental regulations," The New York Times said.
The paper said that "efforts to force other parts of the bureaucracy and the state-run economy to obey rules have been stymied by the self-interest of some groups."
As an example, the Times cited the reluctance of state-owned oil companies to upgrade motor fuels to meet more costly emissions standards ordered by the government.
Similar problems with the power companies may be looming if the government pushes them to give up ever-cheaper coal in favor of costly natural gas.
The situation may be even more complicated because some power companies have also invested heavily in coal production, reaping profits on one side of the business while risking losses on the other.
On Feb. 14, Reuters reported that China's average steam coal prices dropped to 571 yuan (U.S. $94.17) per ton, down 13 yuan (U.S. $2.14) from the previous week, according to the Bohai-rim price index. Prices have fallen steadily every week so far this year.
Philip Andrews-Speed, a China energy expert at National University of Singapore, said that lower coal prices "will make it more difficult for the government to promote the use of natural gas."
But he argued that the coal industry's short-term losses have not been that large, probably amounting to only about 1.5 percent of revenues. Market responses to price shifts are also to be expected, he said.
"This sort of thing always happens when the government brings in radical new policies," said Andrews-Speed.
The question in this case is whether the industry's response will make it harder for the government to discourage greater coal consumption and pursue its air quality goals.
Wang Tao said power plants will have the incentive to burn more coal if the price slide continues, but the effect on air quality may be limited due to slowing demand.
“If the economy also slows down, there will not be much increase needed from those coal-fired power plants, even though the price has dropped," Wang said.