China Fires Up Coal Price Stabilization Plan

China’s state planner has called on coal miners and power producers to work more closely together to stabilize prices of the commodity, following wide gyrations over the last year caused by a sector cleanup.

Companies on both sides of the power-generation aisle should take three major steps to bring stability to coal prices, officials from the National Development and Reform Commission (NDRC) told market players during an industry conference this week in Hebei province.

Chief among those should be more efforts to sign long-term supply contracts between coal and power producers, the agency said. It also urged closer cooperation between the two kinds of companies such as equity tie-ups, and the creation of mechanisms to stabilize prices during times of gluts and shortages.

“Coal prices overall are still relatively high, so the government will take steps to try and guide them down,” said Lian Weiliang, an NDRC vice chairman.

The agency rolled out its campaign as high prices have caused major headaches this year for power producers, while bringing big profits for coal miners. Those high prices are partly the result of China’s efforts to clean up the broader coal sector by shutting down smaller, less efficient mines, which has resulted in tight supplies.

China’s largest coal producers saw their overall profits soar seven-fold in the first nine months of the year to 226 billion yuan ($34 billion), thanks to the higher prices. But power producers experienced the opposite effect, with the top five posting a collective loss of 24.7 billion yuan, versus a 37.2 billion yuan profit for the same period a year earlier.

In January, the NDRC and industry associations representing the coal and power sectors agreed to aim to keep coal prices in a “reasonable” range of 500 yuan to 570 yuan per metric ton, with anything above 600 yuan or below 470 considered outside the desired range. Spot coal prices have varied from as little as 550 yuan per metric ton in May to as high as 740 yuan in October.

In a bid to better help power producers gage the market, the China Electricity Council last week launched an index to track the price of coal used to generate electricity. The China Electricity Coal Index’s launch was timed to come just before power plants will finalize their contracts for 2018 with coal suppliers later this month.

Beijing is also pushing for more equity tie-ups between coal and power producers to reduce price volatility. In the largest of those, earlier this year the central government merged state-owned giants Shenhua Group Corp. Ltd., a top coal producer, with China Guodian Corp., a top power producer.

Contact reporter Yang Ge (geyang@caixin.com)