Regional Coal: Market-orientation is the key for China's coal industry reform, experts

Soaring coal prices, heating demands in power plants, overstocking of coal producers and rising death tolls in successive coal mine accidents have made China's coal industry a target for economic reform, China's People's Daily reported Monday.

"Market-orientation reform is the key to solving the problems in China's coal industry," said Liu Zhenqiu, deputy director of the Prices Department of the State Development and Reform Commission (SDRC).

Coal-fired power plants burn about half of China's coal and produce about half the country's power.

China's coal pricing system is divided into two parts. To ensure the electricity generation use, a certain amount of coal is ordered nationally. To meet the price of electricity, set by the country at an artificially low level, the price of coal used in this sector is kept low too.

The other part, which is sold and bought in market, sees its price rise or fall in accordance with market forces.

During the years from 1997 to 2000 when coal prices remained low, many power companies reduced their national ordering amount greatly, buying coal directly on the market.

Prices began to rise, however, in 2001. In 2004, when the shortage of energy aroused tension in the country, China saw the price of coal, the leading actor in China's energy consumption structure, soar to an all-time high, and power enterprises suffered coal shortages and high costs.

By the end of 2004, the average price of marketable coal is 206. 43 yuan (24.9 US dollars) per ton, 30.77 yuan (3.7 US dollars) per ton higher than the previous year with an increase rate of 17.5 percent. The average price of marketable coal used in power generation was 162.05 yuan (19.6 US dollars) per ton, 21.60 yuan ( 2.6 US dollars) per ton higher than 2003 with an increase rate of 15.3 percent.

"In a sense, the contradiction between the power generation sector and the coal production sector is the direct result of the immature coal market system," said Liu.

According to Liu, both the producers and the consumers are laggard in adjusting themselves to the market system.

In China, big coal consumers such as those in power generation, metallurgy and railway transportation are mostly state-owned enterprises. Because of their significance in the national economy, many industries are put under the strict economic control of the government.

"Confined by the weak railway transportation capacity, which is mainly under state control, both coal producers and consumers have no right to choose their trading partners. As a result, who obtains 'train wagons,' will get coal," said Liu.

"Coal price should be decided in market. Under such a distorted market circumstance, no reasonable price can be formed," he said.

Although emphasizing the significance of market-oriented reform, Liu said that China should also improve its macro-economic control and market supervision ability.

"For example, China's coal export plan should be in accord with its domestic supply and demand status, which should rely on the control of the government," said Liu.

"The key is to give coal producers and consumers the freedom to choose their trading partners and to break up the monopoly of state-owned enterprises in the market," he said.

According to Xie Juchen, president of China power industrial fuel company, coal consumption for power generation in 2005 is expected to reach 1.15 billion tons. Although the supply situation will continue to be in tension, it will be much relieved than 2004 when many power plants have to stop production for nationwide coal shortage.

"In 2005, the shortage of coal for power generation use will only be felt in some regions and in different periods," said Xie.

Liu suggests establishing a pricing system with the electricity price pegged to the coal price.

"The electricity price should represent the supply and demand in the market and the fuel price's varying status," said Liu.

"Establishing cooperative relationships between power generators and coal producers is one of the most effective solutions to the current problems of two sides," said Zhao Yazhou, vice president of China Power International Holdings.

Liu also suggests coal-fired power plants to sign long-term ordering contract with coal producers.

"As the coal demand of power plants is long-range and stable, to sign long-term contract between both sides could not only avoid market risks but also provide a good environment for price to play as important signals of supply and demand in the market," said Liu.

On Monday, representing the SDRC at the Coaltrans 2005 China held in Beijing from April 11 to 12, Liu said that China's annual national fair for ordering coal used for electricity generation and other purposes will gradually be eliminated and instead only small-scale fairs for ordering coal derived from new power generation capacity and other new purposes will be arranged.(*)