China’s embattled power companies may receive a long-sought reprieve from rising coal prices after the country’s state planner ordered miners to increase the share of supplies sold through lower-priced long-term contracts.
The National Development and Reform Commission (NDRC), in an April 7 document, ordered coal companies and utilities to fix 75 percent of their total coal purchases through long-term contracts by April 30, up from the current 60 percent, three power utility officials who received the notice said this week.
Chinese thermal coal futures have rallied nearly 25 percent this year, hitting a record high of 648.60 yuan ($94.11) per tonne in March. Prices are surging on falling domestic supply as China’s government clamped down on illegal mining and required miners to shut production as way to combat pollution and overcapacity.
Requiring miners to commit to larger long-term volumes would reduce costs for China’s electric utilities, which have suffered mounting losses in recent months as coal prices have climbed.
For the miners, the results are more mixed. Shifting to long-term contracts, they will sell less supply at higher spot prices. However, they do lock in sales for a majority of their output near the high prices and gain firm outlets for their supply.
“We would love to sign more long-term contracts with utilities, but the problem is coal producers do not have enough supply to sign with us,” a senior manager with China Datang Group told Reuters.
“The utilities sector has turned unprofitable since October 2016. We expect power companies to make a total loss of more than 100 bln yuan due to the high cost of coal,” he said.
Another source at China’s Huaneng Group said they have arranged meetings with coal miners, trying to secure more supply before the NDRC deadline.
Following a surge in coal prices last year, Beijing capped long-term thermal coal prices at 535 yuan per tonne for big utilities from Dec. 1 – well below the spot market at the time. Long-term contract prices were then adjusted gradually every month, but remain at a 40 yuan per tonne discount to current spot prices.
In the document reviewed by Reuters, the NDRC said it will penalize any suppliers or utilities who do not comply with the deal terms.
Coal producers that default on more than 10 percent of supplies for a contract and do not have at least 75 percent of their sales through long-term contracts by April 30 will be charged higher power prices.
Power companies that fail to take more than 10 percent of their contracted supply under a long-term contract and do not secure 75 percent of their supply on a long-term basis will receive lower subsidies on power prices.
In addition, power companies that fail to reach the target will be restricted in the direct power trading scheme.
The NDRC did not reply to Reuters inquiry for comments.