Price support remarks boost coal miners

Coal stocks rallied yesterday after the mainland's energy chief voiced his support for a higher than expected increase in contract prices with power companies.

Zhang Guobao, head of the National Energy Commission at the National Development and Reform Commission (NDRC), has waded into controversy over coal contract negotiations by saying an increase in the coal price of 50 yuan (HK$56.73) a tonne would be 'reasonable'. That is about 11 per cent of last year's average price and is higher than analysts' expectation of a rise of 5 to 10 per cent.

His comment sent coal producer shares higher, with China Shenhua Energy gaining as much as 4.28 per cent before settling 0.33 per cent higher at HK$18.28 in Hong Kong. China Coal Energy surged 4.88 per cent to HK$6.45, and Yanzhou Coal Mining rose 4.32 per cent to HK$5.79.

Mr Zhang reasoned that a 50 yuan increase was fair because the increase in value-added tax on coal sales to 17 per cent from 13 per cent that was implemented at the start of this year would raise coal producers' costs by close to 20 yuan a tonne, and the impending reform of the resource tax from a volume-based one to a revenue-based one would also increase producers' costs.

He was quoted by the Beijing Times as making the comments at the national energy work meeting that ended on Thursday.

However, Mr Zhang also said it was not the right time to raise power prices, amid the economic slowdown.

This has drawn criticism from power producers.

'It wouldn't be fair for coal producers to be able to pass on higher costs while power producers can't do the same,' a senior executive at a power producer said on condition of anonymity. 'We will definitely not agree to any price increase [in coal].'

The annual coal contract negotiations have traditionally been contentious because coal prices have been largely liberalised while power prices are fixed by the state.

This year, the difference in price expectations is the biggest in at least five years, as coal producers face higher production costs, while power firms suffered from huge losses last year due to pricing problems and face lower power demand this year.

In December, the country's largest coal producer, China Shenhua Energy, demanded a rise of 82 yuan a tonne or 17 per cent for seaborne coal at ports. The five national power producers and China Resources Power Holdings have banded together to refuse to sign a single contract and are demanding a 50 yuan decrease.

Nomura Securities analyst Donovan Huang said the increase suggested by Mr Zhang was overly steep in the current economic environment.

'If one uses cost increase as the reason for raising coal prices, it is not a market-based approach,' Mr Huang said. 'One needs to also look at demand-side factors, and we need a wholistic solution for the energy pricing system.'

Mr Zhang said the price issue had been handed over to the State Council, the Beijing Times reported. The NDRC is waiting for a response.