NDRC looks to shake up coal pricing

A plan to fully liberalize China's thermal coal pricing mechanism was recently submitted to the State Council by the National Development and Reform Commission (NDRC), the country's top economic planner, the Shanghai Securities News reported Monday, citing unnamed industry sources.

With an ultimate goal of scrapping annual contracts altogether, the NDRC intends to encourage coal suppliers and power plants to ink medium- or long-term contracts with durations of three to five years during the annual thermal coal contract meetings which are likely to be held in mid- or late December of this year, according to the report. The new policy described by local media would mark the first time in nearly two decades that the country's coal supply has been completely exposed to market forces.

In another major development for the coal industry, the NDRC is also expected to stop issuing framework plans to allocate railway capacity for thermal coal transportation. Buyers and sellers would instead have to bring their long-term contracts to local railway departments to secure the freight capacity they need.

"Based on the NDRC's plan, railway transportation will become an important tool to promote long-term supply contracts in the future," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times. "Only after coal suppliers and power plants sign multi-year deals can they get their supplies transported through the rail system. This is a smart way to ensure stable supplies and reduce regulatory interference in the negotiation process."

There are currently two channels for buyers to purchase coal in China. They can either buy on a spot market where prices are effected by real supply and demand pressures or via annual contracts coordinated by the NDRC and designed to ensure delivery of a certain amount of thermal coal to power producers at preferential rates to ease the financial burdens facing these companies.

"The existing contract pricing system has drawn much scorn from coal suppliers, many of whom are unwilling to fulfill their contracts when market prices are higher than contract prices," Liu Dongna, an analyst at the Shandong Province-based consultancy Sublime China Information Co, told the Global Times. "And now is a perfect time to really cancel the [annual contract] mechanism as coal prices have recently dropped to levels equal to, or less than, contract prices."

Yet, despite requests for a stronger link between thermal coal prices and downstream electricity prices, the NDRC made no mentions of such calls, according to the Shanghai Securities News.

"As coal prices are relatively low and power generators haven't suffered losses yet, there's no need to rush and tie the two prices together now. The NDRC can raise electricity prices at any time if coal prices again climb too high for power plants," Lin explained.