China Economy

China asks coal miners to cap prices for 2017 supply contracts: sources

Government is trying to stabilise soaring prices resulting from its forced curbs on output of polluting energy

PUBLISHED : Monday, 31 October, 2016, 2:42pm
UPDATED : Monday, 31 October, 2016, 11:33pm

The central government has asked the nation’s top coal miners to cap their 2017 supply contracts at or below current spot market levels, sources said, a highly unusual move that reflects Beijing’s growing panic about runaway prices.

The National Development and Reform Commission At an emergency meeting on Thursday asked miners to agree to set the prices for their 2017 long-term supply contracts at or below 12 cents per kilocalorie for 5,000 kcal thermal coal and for 5,500 kcal thermal coal, two sources who were briefed on the meeting told Reuters on Friday.

Those prices are equivalent to 600 yuan (HK$685) per tonne and 660 yuan per tonne respectively, according to Reuters calculations.

This was the third meeting that the NDRC, China’s top economic planner, has held with the coal industry in a week and the participants included state-owned Shenhua Group Corp, the nation’s largest miner, the sources said.

The sources asked to remain anonymous as they were not authorised to speak to the press.

The NDRC did not respond to requests for comment.

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No agreement was reached in the meeting, but the sources expect negotiations overseen by the government to continue over the next few months.

Coal for delivery at the port of Qinhuangdao, Hebei province – the domestic benchmark price – has risen by more than 50 per cent since the end of June to US$97 a tonne, according to coal industry analysts IHS McCloskey. The surge follows government-enforced mine closures that choked supplies to power companies and forced many of them to import.

The frequency of the government meetings with the coal industry has surprised veteran traders and experts who said Beijing was trying to prevent big spikes in residential energy bills during winter, when coal demand peaks to meet heating needs.

The government typically encourages miners to sell their coal on long-term contracts in meetings held in December.

“However, this year the coal price soared too much and ... the NDRC brought the meeting forward,” said Wang Fei, an analyst at Huaan Futures in Hefei. “It’s unlikely for the coal miners to compromise about the prices, despite the NDRC intervention, as coal miners have been making losses since 2012.”

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The government intervention is the latest unintended consequence of China’s policy to curb excess in its heavy polluting industries and shift the country, the world’s largest energy market, towards using cleaner, renewable sources.

Mine closures and cuts have removed 200 million tonnes of coal capacity, about 80 per cent of the full-year target, triggering the historic rally in global prices.

The government has partially reversed its policy over the past six weeks to stabilise prices and replenish inventories, allowing mines to ramp up output by 1 million tonnes per day ahead of the winter, equivalent to 10 per cent of China’s daily output in 2015.