2.1. Excess Capacity and Its Causes
Coal production capacity, that is, the ability to produce coal, is the total amount of coal that can be produced with the given resources and technical level of all fixed assets that coal enterprises participate in during a certain planning period [7
]. Capacity utilisation ratio (CUR) is the ratio of actual output to design production capacity, reflecting whether the production resources of the enterprise can be effectively utilized [8
]. Excess capacity ratio (ECR) is a concept that is opposite to the CUR; thus, ECR = 100% − CUR. Referring to the U.S. criteria, the reasonable range of ECR is 5%–10%. Overcapacity occurs when the ECR exceeds the threshold of 10%, while under capacity occurs when ECR is below the threshold of 5% [9
Overcapacity is a common phenomenon in a market economy. China is a socialist country. Compared with the developed market economy in Europe and America, China’s market economy is not yet a complete market economy. However, China did not fully copy the Soviet model and established the socialist market economy with Chinese characteristics, which makes the market play a decisive role in resource allocation and gives full play to the role of the government. Since China’s transition from a planned economy to a market economy in the late 1990s, there have been three overcapacity cycles: the first cycle (1998–2001), the second cycle (2003–2006) and the third cycle (since 2009) [10
]. Meanwhile, China’s coal industry has shifted from a shortage of production capacity to overcapacity, and the cycle is basically in line with the national overcapacity cycle [11
]. The characteristics of China’s coal overcapacity cycle can be summarised as long-lasting timespans, repeated occurrences, complex causes and serious impacts [12
]. Therefore, overcapacity always brought about vicious competition, severe waste of resources, imbalance between supply and demand, plunging coal prices and overall financial loss of coal enterprises [13
]. If this problem cannot be solved in a timely and effective manner, it will not only affect the high-quality development of the coal industry, but also hinder the optimisation of China’s energy structure and the prosperity and stability of the national economy [14
Correct identification of the causes is the prerequisite and basis for addressing overcapacity. Overcapacity usually can be attributed to the rigidity of capacity and the fluctuation of demand [16
]. Accordingly, this paper reviews the present literature from the supply side and the demand side.
(1) Causes from the supply side
‘Wave phenomenon’ of enterprise investment. For a developing country like China in a rapid development stage, enterprises in this country are more willing to invest in industries with mature technologies and existing product markets [17
]. Due to the latecomer advantage, it is easy for enterprises to have a consensus on new and promising industries. They are prone to the ‘wave phenomenon’ in investment, and a large amount of money is concentrated in a few industries. Consequently, these over-invested industries will experience overcapacity and related problems [18
Entry deterrence strategy of existing enterprises. In a perfectly competitive market, the manufacturer is the price taker and faces a horizontal demand curve. For a competitive enterprise that aims to maximise profits, the upward-sloping marginal cost curve is its supply curve. In the long-term equilibrium, when the fully competitive manufacturer determines its output at the level of marginal cost equal to the price, it maximises profit. At this point, the marginal cost is equal to the average cost, price and marginal benefit in a perfectly balanced position with zero profit. At this moment, the production quantity of the representative enterprise is the output that corresponds to the tangency point of the marginal cost, average cost and price; there is no surplus production capacity [8
]. However, in the imperfect competitive market, the existing enterprises and the new entrants have a game of interests. The former will curb the latter by maintaining a certain excess capacity and reducing the expected returns [19
]. Although China’s large coal enterprises are basically state-owned enterprises, there are also many small private coal mines. There is a certain degree of game between private enterprises. In the late 1990s in particular, China’s small coal mines boomed “everywhere”. In order not to allow more new entrants to enter the market to share the benefits, they adopt the entry deterrence strategy and even vicious competition, resulting in the waste of coal resources and the destruction of the ecological environment, along with an over-supply and overcapacity in coal production [14
Factor hoarding behavior of enterprises. Rational enterprises will maintain excess capacity when faced with uncertain demand in the future [23
]. On the one hand, it takes about five to 10 years for a coal mine to go from investment to commercial operations. If the coal enterprises closes some mines when they have excess capacity and the demand in the future surges, they cannot build new capacity and increase production in such a short time, and thus they will miss the profits of maintaining excess capacity. On the other hand, industries such as coal, which have high sunk costs, need to pay large costs to adjust production factors. When the market demand is slack, enterprises are likely to sell the equipment below the present value after depreciation, but they need to purchase the equipment at the original price when demand surges [11
Improper government intervention. Unlike other fully developed market economies, government intervention is an important cause of overcapacity in China. In response to the global financial crisis in 2008, the Central Government launched a 4 trillion RMB investment plan and other stimulus policies, bringing huge demand to the steel, cement, non-ferrous metals and other industries. However, overinvestment in these industries adds to the burden of digesting excess capacity in the coming years [25
]. Besides, due to the gross domestic product (GDP)-oriented performance evaluation system, local government officials have strong incentives to intervene in corporate investment and use various preferential policies (such as low land prices, tax breaks and low power prices) to attract investment, thereby increasing fiscal revenue and relieving employment pressure to show their political achievements [26
]. Eventually, this kind of blind investment behavior will lead to overcapacity in the entire industry.
(2) Causes from the demand side:
In theory, the growth of capacity input does not necessarily lead to overcapacity. Only when product demand does not catch up with the growth of capacity input does the overcapacity problem occur [29
]. The demand side causes of overcapacity are mainly reflected in the following aspects.
Relationship with the economic cycle. In general, when the economy is in a recession, shrinking demand may lead to an increase in surplus capacity in most industrial sectors [30
]. Because of the cognitive bias of enterprises, impulse investment occurs when the economy is overheated, while delaying investment when the economy is depressed, which leads to the synchronisation of production capacity and the economic cycle. When the overheated economy recedes into depression, conditions for overcapacity will eventually be formed [31
Coal savings from demand-side management. The term ‘demand-side management’ (DSM) refers to technologies, actions and programmes on the demand-side of energy metres that seek to manage or decrease energy consumption, in order to reduce total energy system expenditures or contribute to the achievement of policy objectives such as emissions reduction or balancing supply and demand [32
]. With reference to this definition, over the years, China has strengthened coal demand-side management to improve coal utilization efficiency and thereby reduce coal demand. Specific actions or projects include: supporting and promoting emerging clean and efficient coal-fired power generation technologies such as the integrated gasification combined cycle (IGCC) [33
], replacing direct coal burning in households with natural gas and electricity [35
], energy-saving renovation of existing buildings [37
], and technical transformation of industrial furnaces [38
2.2. De-Capacity Policy and Policy Effect
China’s coal overcapacity is a joint outcome of oversupply and insufficient demand but given the country’s economic transformation, energy structure optimisation and environmental constraints, it is not realistic to tackle the overcapacity issue simply by stimulating coal demand. Overcapacity is a common phenomenon and sometimes cannot be handled by simple market self-regulation [31
]. For this reason, the mandatory elimination of backward production capacity by administrative means has become a commonly used regulatory tool for the Chinese government to optimise production capacity.
China has issued a series of coal de-capacity policies since 2016, but little research has been done to evaluate the policy effects. In the few related studies, Xu [39
] analysed the effectiveness of the de-capacity policy from a national perspective and concluded that the coal industry’s operating conditions were improved after de-capacity, but this was largely the result of the redistribution of interests among the industries, and at the expense of raising the cost of other industries, it squeezed the profit margin of other industries. Deng et al. [40
] measured the CUR of China’s steel industry and used breakpoint regression to evaluate the de-capacity policy. They found the implementation of the de-capacity policy has solved the problem of overcapacity in the steel industry to a certain extent, but the de-capacity policy has only played a relatively good effect when it was first introduced, and the effect has declined in the long run. Shi et al. [13
] explored the unintended consequences and causes of China’s coal capacity cut policy using an extended version of the KAPSARC Energy Model (KEM) of China and found full and partial compliance with the de-capacity policy results in a significant gap between supply and demand, and the policy was technically infeasible, even allowing for a significant increase in coal prices and economic costs. Yang et al. [41
] summarised the effect of supply-side reform policies in the coal industry from the aspects of coal price, coal inventory, capacity structure, supply and demand pattern, etc.