China Could End Thermal Coal Price Fixing

Dec. 6, 2012 - PRLog -- According to the South China Morning Post, the National Development and reform Commission (NDRC) has proposed an end to “its annual meddling in the pricing of power station coal.”

For years, the Chinese gov­ernment has interceded in the pricing of domestic coal as a way to bat­tle inflation and higher electric­ity costs. Re­cently, however, consumer price inflation for October was at 1.7%, its lowest point in 33 months.

With annual negotiations for pricing 2013 coal contracts just around the corner, this could obviously be a move that leads to higher domestic coal prices and an in­creased incentive for a competitive import market.

“Yeah, this could increase imports,” a source with Asian connections said. “In addition, it could give Chinese buyers an incentive to look at longer term contracts for imported coal. Now they treat imports as their spot supply.”

Chinese domestic suppliers have for years been forced to sit down at the annual con­tract meetings and agree to supply utilities coal at prices fixed by the government. Those prices have invariably been well be­low market rates.

Contract pricing for 2012 was put at 570 yuan per tonne (US$91.56/t) and spot pric­es had a limit of 800 yuan (US$128.50/t).

“At first glance, it would create a period of havoc-slash-panic as people adjust to market factors, possibly resulting in near term shortages as the transport, mining and power sectors adjust to a new scheme – particularly since the present scheme has been in place for years,” an Inside Coal source said. “It creates the possibility for rampant corruption as well, but that’s an­other story.

“Because the rails -I believe - are state owned and not private, I don’t know how this will impact rail tariffs. Perhaps, the rail costs will rise, without the government control. Then the Chinese can be like the Yanks and complain about rail rates.”

Voting on the NDRC measure will have to go through the central government’s state council and a decision is expected soon with the contract meeting looming.

“They will need to approve it before we start the annual contract conference, which is normally held in early December,” a source told Reuters. “The main aim is to open up the coal market and it is now a good time to do so because spot prices have fallen sharply and are converging with term prices.”

Of course, the NDRC implied government regulators could still step in and impose their will on pricing under “extraordinary situations,” the South China Post said.

It’s that little bit of phrasing where doubt begins to creep in on how long the new free-market approach might survive.

“A hands-off approach this year is feasible given the market conditions,” Daiwa Secu­rities analyst Dave Dai told the paper, “but what if inflation creeps up again next year when the economy improves?”

Then it’s likely a back-to-business-as-usual approach could come back into play.

Utilities obviously benefit from the fixed-cost rates when global pricing shoots up as it did after Australian flooding in 2011. But the back half of 2012 has been a different story with a slowing Chinese economy and tumbling coal prices.

When global pricing at times slipped be­low the fixed domestic rate, Reuters reported some utilities de­faulted on domestic cargoes and left do­mestic producers and traders to deal with take-or-pay contracts with railways.

Sound familiar? News of Chinese traders defaulting on import cargoes when pricing was in the midst of its nosedive made the rounds several months ago.

Another Inside Coal source said his imme­diate reaction to the report was “scepticism.”

“Sounds like the government can still step in and take charge whenever it wants,” he said. “It may help spot imports, but I’m not sure companies will want to get into the longer-term import deals because of the uncertainty.”

This article was first published in Inside Coal, 28 November 2012. Subscribe to Inside Coal to receive daily updates on events shaping the international coal sector.  With careful analysis and insight from specialist writers based in North America and Asia Pacific, Inside Coal is the place for all the latest news and developments in the coal and related industries.  Also included is Energy Publishing’s renowned Coking Coal Index.

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