Longer coal contracts may rein in prices

In China's coal sector that has been marred recently by price surges, regional authorities and related enterprises should ensure the fuel consumed by power generators and heat supplying companies is sourced under medium- and long-term contracts, a recent guideline released by the National Development and Reform Commission, the country's top economic regulator, stated.

Wei Hanyang, a power market analyst at BloombergNEF, said,"The policy aims to curb the coal price surge, which could otherwise be unaffordable for power plants or lead to higher power tariffs, which are undesirable for the Chinese economy."

Wei said the guideline has raised the contract requirements for both buyers and sellers of coal compared with the previous instruments.

He said the guideline is conducive to safeguarding the long-term interests of both suppliers and consumers of coal.

The NDRC ordered thermal power suppliers and heat suppliers to sign additional medium- and long-term coal agreements with coal producers based on their existing contracts this year, to ensure their annual coal consumption will be 100 percent covered by these deals.

The medium- and long-term contracts refer to contracts signed by players on both the supply side and the demand side for a period of one year or longer with a clear quantity and price mechanism, the NDRC guideline stated.

Wei said, "Coal companies are likely to be willing to surrender some margins, which is why a renewed contract for coal sales is needed, and now power plants can minimize exposure to any surges in the spot coal price."

China has been experiencing coal shortages for more than three months with prices remaining at high levels, which place a heavy cost burden on utilities.

China's coal prices soared to a record high this month and demand has also remained robust with power plants in northern parts of China beginning restocking ahead of the winter heating season.

The NDRC guideline encourages both sellers like coal producers and consumers of coal like power generators and heat suppliers to sign contracts for three years or longer periods. The supply volume of three-year or longer contracts should represent 30 percent of all medium- and long-term contracts, it said.

Last year, China's coal consumption reached 4.04 billion tons, accounting for 56.8 percent of the total energy consumption.

The coal consumption in the power generating and heat supplying sectors is almost 2.38 billion tons, accounting for 59 percent of the country's total coal consumption.

A high coal price would lead to a net loss for the electric heating supply enterprises and thus have an impact on the economy and people's livelihood.

The proportion of coal consumption in China is expected to drop to about 51 percent by 2025, according to a report from the China Electric Power Planning& Engineering Institute.