Mainland coal and power producers are set to lock horns later this month when they meet to negotiate supply contracts for the new year. Industry watchers anticipate protracted wrangling between the two sides over both price and delivery given the challenge of forecasting power demand with any degree of certainty against a backdrop of slower global economic growth and aggressive government pump-priming. At present, negotiating positions of the two parties look miles apart. 'I think power producers should adopt a tough stance this time,' said an investor relations official at one of the mainland's listed power generators. 'We should aim to lock in volumes instead of agreeing to a price too soon. We should ignore the offer prices of suppliers and not make counter offers too quickly, since the longer we delay agreement, the lower spot market prices will be.' Coal producers, on the other hand, were initially looking to raise contract prices for next year by between 5 and 10 per cent since they argued that spot prices had risen 20 to 50 per cent above existing contract prices and the gap should be narrowed. But these expectations have already been toned down because of the harsh economic reality that has emerged in the closing months of the year. According to a Nomura Securities research report, coal-fired power output fell 5.2 per cent year on year in October, as steel output contracted 17 per cent and cement output rose only 1.1 per cent. Both are heavy power-consuming sectors. The brokerage's analyst Donovan Huang quoted power distribution giant State Grid Corp of China as forecasting mainland power demand growth might slow to between 4 and 8 per cent next year from 6 to 8 per cent in 2007 - the first year in which growth retreated to single digits. National power consumption rose 8.3 per cent in the first 10 months of 2007, according to the China Electricity Council. 'Prior to the sharp economic downturn, some in the coal industry were expecting a price rise of 15 per cent to 20 per cent, but now they are talking of 10 per cent or below,' said a senior official at a listed mainland coal producer. Coal producers have to face the reality that spot prices have fallen by 36 to 42 per cent compared with peak levels in July, said a BNP Paribas research report. And prices were likely to fall further given the economic slowdown that had seen coal inventories rise to a record 9.29 million tonnes at the country's largest Qinhuangdao coal port, it added. 'With an average coal inventory of around 24 days of consumption at the country's power plants, it would be unrealistic for power producers to ask for an increase for next year,' the power generator executive said. Power producers have suffered badly. Early this year most signed contracts with suppliers agreeing to price rises of about 10 per cent. But sharp gains in spot prices saw coal producers renege on the contracts and revise them up. The end result is markedly higher prices on contract sales, with some power producers being forced to procure more coal from the more expensive spot market, especially smaller ones. The country's largest listed power producer Huaneng Power International and Shandong province's largest producer Huadian Power International saw their contract coal prices rise more than 40 per cent this year, much higher than the 10 per cent originally agreed. Both are expected to post huge losses for this year on the back of high coal costs and hefty interest expenses. 'Given that coal producers jacked up the price rise to 40 per cent already this year, how could they demand any increase next year?' said a power producer executive. 'They should indeed cut prices sharply ... to the original level we agreed on early this year.' Analysts said large coal producers such as China Shenhua Energy and China Coal Energy, which did not renege on original contract prices this year because of government pressure, could agree to a zero price increase for next year's contracts. Other coal producers, which had reneged on contracts, would be under pressure to cut prices. With Beijing aggressively slashing interest rates last week and with more reductions expected next year, analysts said power producers had likely weathered the worst of their cost challenges. Plunging seaborne coal transportation prices have also helped. 'Given the declining trend of coal prices and interest rates, I'd say the low point of power generators' profitability has passed,' said Dao Heng Securities analyst Fan Yunfeng. 'But this is not to say they'd make a big comeback next year as it'll take quite some time to get back to 2007's profit levels.' Ms Fan said falling power demand could result in an expected 8 to 10 per cent decline in generation capacity utilisation next year, while poor profitability of the power-hungry cement and metal-smelting sectors had dimmed hopes of further power price increases after two rises last summer.