China encourages medium, long-term coal contracts to stabilize prices

BEIJING - China is pushing for medium and long-term contracts between coal producers and buyers to stabilize supply and rein in market volatility as surging coal prices have heated concerns about the industry's ongoing cuts on excessive capacity.

Major coal miners Shenhua Group and China National Coal Group Corp on Tuesday inked such contracts with China Huadian Corp and State Power Investment Corp, both thermal power conglomerates.

The two sides specified the amount of coal supply for the contract length and set a basic price of 535 yuan ($78.87) per ton, with clauses to allow for market-oriented price adjustments. No further details were disclosed.

The cooperation of State-owned coal and power companies is the latest push by the authorities to ease the current coal shortage.

"It will help maintain the stability of coal prices and the market," Xu Kunlin, deputy secretary general of the National Development and Reform Commission, said at a press conference Wednesday.

Xu promised policy support and encouraged more mid- and long-term contracts to be inked in the sectors.

Coal prices are on the rise due to a temporary supply shortage, as well as temperature drops and speculative activities.

The Bohai-Rim Steam-Coal Price Index, a gauge of coal prices in northern China's major ports, rose to 607 yuan per ton last week, the 18th consecutive rise and about 63.6 percent up on the start of the year.

Xu described the price hike as "irrational." China's coal reserves generally remained stable as effective production capacity stood at around 5.4 billion tons after outdated and under-performing mines were shut down.

"We are completely capable of guaranteeing coal supply," Xu said, citing relaxed daily output limits for efficient coal producers and huge untapped potential of clean energy.

Xu also dismissed concerns that surging prices will have a negative effect on the overcapacity reduction drive.

"It (the price rise) will not last in the long run and the coal industry is still plagued by overcapacity. The government's resolution (on excess capacity cut) is unwavering," Xu said.

China is downsizing its coal industry, planning to cut coal capacity by half a billion tons in the next few years.