Regional Coal: China scraps coal cap as prices balance

China, the world's biggest coal consumer and producer, will remove a limit on the price of the fuel, allowing buyers and sellers to negotiate annual contracts in talks starting next week, The Standard reported in its Friday edition.

China's National Development and Reform Commission, the nation's top economic planner, in August last year limited fluctuations in the price to 8percent higher or lower than a benchmark. Coal rose to records in late 2004, increasing the burden on the nation's power producers and contributing to electricity shortages.

"Measures introduced by the commission at the end of last year will be lifted and suppliers and buyers should determine the price levels," the China Coal Transport and Distribution Association said Thursday on its Web site, citing a notice from the commission dated December 27. "Coal supply and demand is becoming more balanced. Big price fluctuations aren't likely."

Coal prices in China surged in late 2004 because of rising demand for power as the nation's economy grew. Transportation bottlenecks in the rail network last year prevented efficient delivery of the fuel, boosting prices.

International prices for coal next year are forecast to fall from records as Australia expands ports and Indonesia boosts exports of thermal coal. Prices of the fuel for immediate delivery from Newcastle port, the world's largest coal export terminal, fell 20 percent between August and November.

Coal suppliers and buyers are scheduled to start talks for 2006 supplies on January 1 in Jinan, Shandong province, China's coal association said. The talks will last 10 days.

The commission advised suppliers and buyers to sign contracts covering more than five years and 200,000 tonnes a year, to get better prices, according to the notice.

"You can see the government is gradually introducing more market mechanism into the pricing of commodities," said Huang Qing, board secretary at China Shenhua Energy, China's biggest coal miner. "Coal prices ought to be determined by the market and better pricing will also boost the quality of the coal produced in the country."

In May, the reform commission allowed electricity generators and distributors to pass on increased fuel costs to customers, including households. Power suppliers must first propose increases to the commission, which assesses the proposals based on change in costs and the economy's needs.

The government increased power prices by about 0.2 yuan (19 HK cents) for every kilowatt-hour in May under the system to pass on 70 percent of rising coal costs. "We're aiming to keep next year's contract prices steady in the coming talks," said Zhang Shangde, a coal buyer at Datang International Power Generation, China's second-biggest generator. "There may be tough negotiations ahead as the easing of the caps means prices will be more market-driven."

China's local and export demand for coal next year may total 2.25 billion tonnes, with supply at 2.26 billion tonnes, the association said on its Web site, citing Ou Xinqian, a vice chairman at the reform commission.

China, the world's biggest power consumer after the United States, may use 11 percent more electricity next year as economic expansion pushes up demand, the China Electricity Council said on November 1. (*)