Caixin
Nov 10, 2016 06:11 PM
ECONOMY

Two Top Power Producers Sign One-Year Coal-Supply Deals

(Beijing) — Two top Chinese power generators signed major supply contracts with two of the country's largest coal producers this week in a bid to counter recent price spikes that threaten to derail Beijing's drive to slim down the mining sector.

The state-owned producers, Shenhua Group Corp. and China National Coal Group Corp., signed the one-year deal for thermal coal, used to generate power, with two state-owned power generators in Beijing.

The deal, which takes effect Dec. 1, will involve the sale of thermal coal from the two miners to China Huadian Corp. and State Power Investment Corp. for 535 yuan ($79) per ton, said Xu Kunlin, vice secretary general of the National Development and Reform Commission (NDRC), at a briefing on Wednesday.

Coal prices have soared in recent weeks amid Beijing's ongoing drive to reduce overcapacity by shutting down older and smaller mining companies. The result has been a coal shortage heading into the cold winter months when demand typically spikes.

Government efforts since September to boost coal supply and pressure mining companies to lower prices have had little effect. The Bohai-Rim Steam-Coal Price Index, which measures domestic thermal-coal prices in the country, has risen 64% from the beginning of the year to 607 yuan per ton last week.

"So far, this contract is only for one year, but in the future we'll encourage more companies to sign five-year and 10-year contracts," Xu said.

Such longer-term supply deals are common when markets become volatile, helping commodity buyers to control costs when prices are rising rapidly. But those contracts can also become a burden if prices begin to fall, forcing buyers to purchase goods at rates above market levels.

China rapidly built up sectors like coal and steel to feed its economy during more than two decades of rapid growth. But as the economy stalls and the global economy remains tepid, the country is now faced with overcapacity of such commodities.

The State Council has vowed to cut crude steel capacity by between 100 million and 150 million tons over the next five years, and not approve any new coal mines before 2019.

The recent price spikes mean the reform is not working exactly as planned, Xu said. "But our resolution to cut overcapacity in the coal sector is unwavering," he added.

Commodity exchange regulators are also cracking down on speculation from short-term investors seeking to capitalize on spiking prices. Thermal and coking coal futures have hit their highest levels since 2013, prompting the country's two exchange operators to raise transactions fees.

While the shortage of coal could eventually ease with government intervention, there is no sign that prices will drop by the end of this year, said Deng Shun, a commodity analyst at Success Futures.

Contact reporter Chen Na (nachen@caixin.com); editor Doug Young (dougyoung@caixin.com)

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