Coal mines, utilities ink long-term price deal

China's major coal producers and power groups have signed a long-term deal at a fixed price to ensure stable coal and power supplies in the country, in a bid to hammer out a strategy to halt the persistent rise in coal prices, the nation's economic regulator said on Nov 9.

Two of the nation's top coal mines, Shenhua Energy Co and ChinaCoal Energy Co, have signed long-term supply contracts with utilities at 535 yuan ($79; 72 euros; 64) per metric ton, 25 percent below the current spot market rates, as the government ramps up its efforts to cool the red-hot market.

The long-term deal will start on Dec 1, and will help prevent violent fluctuations in coal prices and maintain an orderly market, Xu Kunlin, deputy secretary-general of the National Development and Reform Commission, said at a briefing.

Zuo Qianming, an expert with the China National Coal Association, says the price rise has to do with China's effort to cut overcapacity and regulate its coal sector.

"Despite the fact that thermal coal prices have hit a record in recent weeks after the government tried to tighten supplies for utilities, causing much concern in the industry and among the public, it is still demand-driven," Zuo says.

"However, as coal consumption declines year by year, the country should still stick to reducing overcapacity despite the recent drastic price rise."

The country's intensified effort to cut overcapacity had led to huge increases this year in bulk commodity prices, including thermal coal.

Despite government efforts since September to boost supply, the surge has yet to be eased and has drawn the scrutiny of top authorities.

According to Xu, there was no reason for sustained increases, and prices might drop after sporadic factors fade away. A periodic coal supply glut and price decline are likely, Xu says.

"Once the sporadic factors fade away, a periodic coal supply glut and a price decline will be high-probability events," he says. "The recent coal price surge in China was irrational and unsustainable, and the prices will retreat as supplies increase, with no basis for further rises in coal prices."

Xu adds that supply-and-demand in China's coal sector has not changed and has reached a balance due to controls on output.

"The country should firmly stick to the overcapacity reduction program despite the price hikes," he says. "In the long term, with coal consumption capacity gradually declining, the coal market will hardly see any increase, and with new energy gradually replacing traditional energy, such as coal, there will be barely any substantial growth capacity for the coal sector."

Zuo says the deal would also help avoid a big hike in residential power costs.

This is the first time the NDRC has held a news briefing to discuss this year's coal price rally and concerns about tight supplies of the raw material used by utilities.

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

zhengxin@chinadaily.com.cn