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To most of the coalmines and power plants, the single-price system of thermal coal will have limited impact on their business operations and will not affect the normal production of coal and power enterprises, according to the NDRC release. Therefore the NDRC has decided to abolish provisional price intervention.
After government-coordinated contracts are abolished, the price of thermal coal will depend on market supply and demand. Given that it is now winter, the demand for coal is rising rapidly but will decline after mid-February. As for supply, China's major coal producing regions including Shanxi and Shaanxi provinces, and Inner Mongolia Autonomous Region are expanding their production capacity, while major international coal production countries will expand their exports to China because of sluggish overseas demand. Therefore in the next few months or even longer, surplus supply will not change substantially. Moreover, since the stockpiles of thermal coal in power plants are already high, prices are unlikely to rise, providing an opportune time to reform the market.
Coal producers have always advocated market-oriented reform of thermal coal prices, and now their wishes have been fulfilled. But those power plants accustomed to special government protection are reluctant to accept the change.
An anonymous official from China Datang Corp. said the government should continue to impose a ceiling on the thermal coal price in order to maintain a stable and reliable supply. China Datang Corp., China Guodian Corp., China Huaneng Group, China Huadian Corp. and China Power Investment Corp. are the five biggest power groups, installing 60 percent of the country's thermal power generation sets. Li Ying, chief economist at State Grid Energy Research Institute, said thermal power companies have been losing money.
Since the demand of thermal coal is now sluggish, once the dual cost system for thermal coal is abolished it would be hard to reverse the price decline of thermal coal in a short time. "However, if coal prices rise, power plants will be unable to afford high coal costs," said Wang Zhixuan, Secretary General of the China Electricity Council. Such a situation is hardly rare because there is already a huge amount of speculative capital in the coal market, jacking up prices.
Wang is also concerned that if either the coal or power industry faces major market fluctuations, the other side could be devastated and could cause a split of the country's power supply chain and threaten power security. For example, in the past when the market price of coal rose rapidly, some coal producers broke their contracts to supply power plants because the coal costs set by the government were lower than the actual market value. If power plants are not allowed to increase electricity prices in accordance with the higher cost of coal, power plants will suffer huge losses and intensify power supply shortage.
During an eight-day annual coal transaction conference held in north China's Shanxi Province in late December 2012, suppliers and buyers from across the country signed sales contracts involving 788 million tons of coal.
Many power plants signed contracts to purchase coal at the conference without government intervention. Thermal coal at 5,500 kcal per kg was traded at 625 yuan ($99) per ton, lower than the market price of 634 yuan ($101) per ton in December 2012 and continuing the trend in declining coal costs.
Knowing that January 1 was approaching and the ceiling on thermal coal prices would be lifted, power plants and coal producers were haggling over every penny in negotiations. Without coordination by the government, both power plants and coal producers were trying their best to protect their own interests.
At the conference, Shanxi Yangquan Coal Industry (Group) Co. Ltd. signed contracts involving 38.6 million tons of coal, while its total output in 2012 was 58.52 million tons. Because of weak demand, the market did not have a strong reaction to the new reform.
At times of high coal prices in the market, coal producers were looking forward to the end of government intervention. But when prices were low, some coal producers held less power in negotiations, thereby prompting the creation of a third-party transaction platform.
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