New coal price system beneficial to Chinese miners in long term: NSBO
Huaihua, China (Platts)--13Dec2012/836 am EST/1336 GMT
A reform to China's coal pricing mechanism that is set to be implemented
in January 2013 will be beneficial to coal miners over the long term but the
gain will be capped by lower international coal prices, according to a report
by London-based, China-focused investment bank NSBO published Wednesday.
The reform will have limited short-term impact on the independent power
plants, particularly considering the high stockpiles and available days, the
report said. Over the longer term, however, IPPs are at greater risk from
The NDRC is still likely to step in to curb excessive price increases as
the electricity pricing mechanism has not been reformed in tandem. Government
intervention may not actually decrease, as the NDRC still has the right to
overall control of coal prices and power tariffs, the report said.
China's State Council approved the thermal coal pricing reform last
week, which will replace the NDRC-set annual key coal contracts with medium-
or long-term contracts negotiated between miners and IPPs, according to
reports by China's state media including the China Securities Journal.
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Under the new system, the settlement prices will be negotiated by
suppliers and users without government intervention. The NDRC will also stop
allocating railway capacity to the coal sector, which means suppliers and
power companies will need to negotiate with the railway bureau directly based
on real demand. The NDRC will continue to encourage miners to sign medium- or
long-term contracts with power companies, but will give sellers the freedom
to adjust prices on a quarterly or half-yearly basis.
Meanwhile, the coal-electricity pricing linkage mechanism, which is
determined by the NDRC, has not been initiated, with the government only
saying that it will continue to improve it and implement temporary measures
to intervene during periods of sharp coal price fluctuations.
China has implemented a two-tier coal pricing system since 1996, with
annual key contract and spot prices. Key contract thermal coal accounts for
20-30% of China's total thermal coal supply, and the contract prices can save
power generators as much as Yuan 200/mt ($31.83/mt) compared with the spot
prices. The annual contracts, which obligate coal suppliers to sell thermal
coal to power plants at preferential prices, are done so to ease the
financial pressures faced by power producers.
During periods of rising coal prices, however, local coal miners had
little incentive to execute existing contracts to meet the demand of
coal-fired power plants, preferring to sell more coal to the market. As a
result, only 40-50% of the key contract coal has been fulfilled in recent
years, the NSBO report said. This is despite the NDRC's supervision of key
coal contracts, which supposedly prohibits the thermal coal specified under
key coal contracts from being sold at spot prices or for other purposes.
By contrast, in times of lower spot prices, as seen this year, it was
the power companies that defaulted on their contracts, causing miners to
incur heavy losses as they also had take-or-pay contracts with the railway
bureau for transport capacity.
--Reggie Le, email@example.com
--Edited by Jonathan Dart, firstname.lastname@example.org