Will help suppliers control costs, optimize operations
The country's top economic planning agency said on Wednesday that thermal coal market reform made progress as four major coal producers and power companies signed long-term contracts that call for prices to be set within a certain range, based on market levels.
China's leading coal producer Shenhua Group Corp and the China National Coal Group Corp struck mid- and long-term contracts with an agreed price with power majors China Huadian Corp and the State Power Investment Corp on Tuesday, Xu Kunlin, deputy secretary general of the National Development and Reform Commission (NDRC), told a press conference Wednesday.
The announcement came as rising coal prices heated up concerns about the nation's cuts of excess coal capacity.
Experts said coal producers and power firms have often signed long-term contracts, but they did not fix prices under these agreements, instead relying on spot market prices in actual transactions. Implementation of the contracts was also weak, with both sides breaking the contracts when prices moved to their advantage.
The contracts signed Tuesday have a base price of 535 yuan ($78.87) per ton for coal with heating value of 5,500 kilocalories. The price can fluctuate according to market conditions. The contracts last longer than 12 months, according to the NDRC.
In comparison, the current Qinhuangdao port coal price, the benchmark for China, stood at 585 yuan per ton for contract coal as of this week.
"Enterprises are the players and they worked out the contracts voluntarily. The NDRC did not interfere but is happy to see the inking of the contracts, as it is a situation we have long wanted to see," Xu said.
Xu noted that a long-term contract with a fixed price is good for the markets. It will allow suppliers to control their costs and arrange their operations more accurately.
Lu Junling, another NDRC official who spoke at the press conference, said the agency hoped to expand the model to the steel, construction material, and chemical industries, replacing spot pricing with pricing based on mid- and long-term contracts.
Li Chaolin, a Beijing-based coal researcher, said the moves by the majors could signal a change in the thermal coal market and more companies are likely to follow.
"The price [in the contract] is lower than the Qinhuangdao price, which shows rationality. Long-term contracts represent a model that allows both parties to profit, instead of one side getting a windfall at the expense of the other," Li said.
"After ultra-low coal prices and temporary shortages for the fuel in the past few years, the implementation of contracts this time will be better than before," Li said, noting the campaign on overcapacity has underpinned coal prices.
Xu also said that the fundamentals do not support what he called an irrational rise in coal prices, noting that China still has 5.4 billion tons of annual coal production capacity even after a capacity-cutting campaign removed 300 million tons in 2016.
The NDRC also said that preliminary investigation has shown that some "malpractices" by companies compiling the coal index, such as improper collection of data, have provided misleading information to the market.
