A power plant in Huaian, Jiangsu province. Power companies expect to see a "severe" power supply shortage this year, with shortfalls ranging from 8 million kilowatts (kW) to 14 million kW. [Photo / China Daily]

Coal prices 'will rebound' after government controls expire

BEIJING - China will face further power shortages this year and coal prices will likely rebound after government-mandated controls expire, according to company officials and analysts.

China Southern Power Grid Co, one of the two major State-owned power distributors, expects to see a "severe" power supply shortage this year, with the largest shortfalls ranging from 8 million kilowatts (kW) to 14 million kW.

The company said that March through May will be the three most difficult months for power supply, and Guangdong province will have the biggest shortfalls within the grid, reaching 6 million kW to 10 million kW.

To meet the rising power demand and cut coal-fired plants' losses, the National Development and Reform Commission (NDRC) said on Nov 30 that thermal coal prices at nine major ports - including Qinhuangdao, Caofeidian and Tianjin - should be less than 800 yuan ($126) a ton starting on Jan 1.

The NDRC also said that term-contract coal prices couldn't be hiked by more than 5 percent.

However, analysts said that thermal coal prices will rebound when the government lifts controls, which will probably happen after the second quarter.

"The regulation has taken effect," said Dai Bing, senior analyst at the coal-trading website coal.com.cn. The thermal coal price at Qinhuangdao, the major coal trading port in China, was 800 yuan a ton on Tuesday.

However, Dai said that it would take time to see if the government's moves had a long-term effect, as there was little supervision of industry compliance with the rules.

He said that based on experience, coal prices will definitely rebound after the government lifts the price ceiling.

The government regulated thermal coal prices once before, in 2008, but prices rebounded after the limit was lifted.

An industry analyst who declined to be identified said the government regulations will distort the supply-demand relationship, which should be driven by a free market.

The NDRC announcement didn't give an end date for the price controls or a clear definition of "stable coal prices", which made the market unpredictable, the analyst said.

Furthermore, many coal traders are evading the rules.

"Since the regulation limits only port-trading prices, some coal traders try to complete trades at coal production bases," Dai said.

Also, "traders want to sell more coal on the spot market to avoid the 5-percent ceiling on price hikes for term-contract coal", he said. "They would also hold onto their coal reserves instead of selling them now."

"It is clear that the central government is taking strict measures to rein in thermal coal prices," said Wu Chenghou, consultant at the China Coal Transportation and Sales Society.

"Supply and demand for thermal coal are hard to predict because they largely depend on policies," he said.

China raised on-grid electricity prices by 0.025 yuan a kilowatt hour (kWh) and electricity prices for industrial users by 0.03 yuan a kWh on Nov 30.

Wu said the electricity price rise and the coal price regulations had helped coal-fired power plants this time by reducing their costs and raising their incomes.

Whether these moves will help them end ongoing losses will depend on the situation at each plant, he said.

Since coal prices are largely market-oriented, while electricity prices are set by the government, rising fuel costs in recent years have put many coal-fired power plants into financial difficulties.