Coal prices in China declined by 16% in 2013 as the economy cooled and the government stepped up efforts to curtail air pollution, according to Bloomberg. China is the largest producer and consumer of coal and burns as much coal as the rest of the world combined. Coal represents 70% of China’s electricity generation, but the government set a goal of reducing that share to 65% by this year, accelerating it from its original 2017 target.

China’s GDP expanded at a 7.7% annual rate in the fourth quarter of 2013, a pace that is relatively consistent over two years. The Chinese economy has slowed relative to the extraordinary double-digit heights of the prior decade (leaving aside the financial crisis), and while slower growth explains some of the pains in the Chinese coal industry, a much bigger factor is the central government’s concerted effort as of late to improve air quality. Cities like Beijing and Shanghai have been suffocating for the second winter in a row amid incredible levels of smog, affecting more than 600 million people.

In an effort to break its dependence on coal, the Chinese government has turned to all the alternatives it can find. China and Russia are zeroing in on a deal that may lead to more natural gas pipelines between the two countries. While a dispute over pricing has held up the deal for long time, it seems to be a natural fit – the largest consumer of energy in the world sits right next to one of the largest producers of natural gas. China also has plans to build new import terminals to access more liquefied natural gas. And in 2013, China may have installed more photovoltaic solar power in one year than the cumulative total of the United States. For years China has been a top manufacturer of solar panels, but it is now a major market for solar PV as well.

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What does this mean for coal? Slowing Chinese demand for coal has already been on the radar of market analysts in recent months, as this Wall Street Journal article indicates. Imports are expected to decline, putting pressure on producers around the world. Australia could be a big loser in this regard.

While that may be a bit of old news, what has gone underreported in the western press is the fact that even Chinese coal producers may now be under the gun. According to Bloomberg, China’s banking regulator is warning about credit risks in the coal-mining sector. Coal prices dropped 16% last year, which may force some Chinese coal producers out of business. Even China’s second largest coal producer is hurting – China Coal Energy Company expects a 65% decline in profits as a result of lower coal prices.

This is apparently not just a worry for companies like China Coal Energy Co. The China Banking Regulatory Commission is concerned that defaults in the coal sector could affect Chinese banks that have exposure to coal. If enough loans go bad, the damage could spread to the wider economy.

It is also an example of how an industry can appear successful amid speculation and a growing economy. Once things cool off though, it becomes evident the foundation is not as strong as it once seemed.

By. Nick Cunningham