“Production by key state-owned mines is running at the lowest level since 2011 and has shrunk by 9% year-on-year, which is much larger than a YoY 1% drop in thermal power generation in January-April,” Macquarie Wealth Management said of May data which revealed that thermal coal prices in China had “risen a bit”.

“So despite the typical impression of Chinese coal mines being state-owned enterprises reluctant to restrain output, production cuts have been quickly made.

“This may be partly driven by administrative orders from the government but is probably also reflecting the extreme difficulties the mines are going through.”

The broker said China Shenhua Energy had also announced 10-40% pay cuts last Friday.

“Anecdotes suggest some mines started to be in arrears with paying salaries even in 2013, and a survey done by Sxcoal suggests 80% of the main thermal coal and coking coal mines were in losses (albeit on total cost basis) in April and that 59% of the mines were late in handing out salaries and 80% have cut pay,” the broker said.

“While it is yet too early to see supply rationalisation reverse the major price downtrend, the efforts in controlling supply have borne some fruit, as the pace of inventory growth at mines has slowed.”

Macquarie said it was feeling slightly more positive about the medium-term domestic supply outlook as “supply rationalisation has happened faster than initially thought”.

“The risk, though, remains that higher prices could bring the supply discipline that is still forming to an early end – these mines are idled rather than closed,” the broker said.

“In the short term, the government’s policy easing stance should help both sentiment toward and demand for thermal coal, but June-August is a high season for hydro power generation and the growth in hydro power has not slowed.

“So it is not yet fully certain that the rebound in thermal coal prices will last into 3Q15 – particularly if international markets are heading lower.”