NDRC may reform coal pricing

Now is a good time to further liberalize China's thermal coal pricing scheme, experts said Wednesday, as domestic thermal coal prices have been falling since the beginning of the year amid the economic slowdown.

Shanghai Securities News reported Wednesday that the country's top economic planner, the National Development and Reform Commission (NDRC), is mulling a reform of China's thermal coal pricing, and a more market-oriented pricing scheme may be launched by the year's end.

Because the government has put on a cap on electricity prices, current thermal coal pricing allows power companies to buy thermal coal at a contract price much lower than the market price, in order to ease cost pressure.

The contract price is usually set in an annual negotiation between power groups and coal producers held at the end of the year.

"Contract thermal coal accounts for 20 to 30 percent of China's total thermal coal supply, and the contract price can save power generators as much as 200 yuan ($32.06) per ton of coal," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times Wednesday.

Lin said that now is a good time to make thermal coal prices more market-oriented, as spot thermal coal prices have fallen nearly to the level of contract thermal coal prices, so power companies' profits will not be greatly affected even without the privileged contract price.

According to coal industry Web portal coal.com.cn, thermal coal prices have dropped nearly 200 yuan per ton since the beginning of this year to some 640 yuan per ton at present.

The NDRC was not available for comment as of press time.

Mu Wenxin, a senior industry analyst at commodities portal Umetal, told the Global Times Wednesday that the potential change in thermal coal pricing could mean a major hit for electricity companies, as thermal coal accounts for over 70 percent of the total operating costs of power plants.

China Electricity Council, an industry association that represents major domestic power groups, said in a statement Tuesday that electricity pricing, which is now mainly stipulated by the NDRC, should also be reformed if there is a change in thermal coal pricing.

The council has called for a link between thermal coal prices and electricity prices as a solution to ease the cost pressure that would result from the reform in thermal coal pricing.

"Tying electricity prices to thermal coal prices would be the only way out," said Lin, who also noted that before the link is established, power plants may see short-term losses.

Lin also noted one possible scenario: That both thermal coal and electricity prices might rise after the tie is formed, but noted, "the government could adopt administrative measures, such as giving subsidies to consumers to avert the impact of the reform."

For coal producers, the reform is supposed be beneficial. But in fact, Mu from Umetal said, there is also downside, as the new move could mean coal producers lose the government support they currently receive when they provide thermal coal at contract pricing.