A thermal power plant in Shantou, South China's Guangdong Province Photo: CFP

China Taiyuan Coal Transaction Center is always crowded with people in December. The center hosts an annual year-end trade fair, and this year nearly 70,000 merchants arrived in Taiyuan, capital of coal-rich Shanxi Province in North China to attend the fair, which ran from December 12 to Thursday.

It was the second year for coal sellers and power utilities to negotiate prices themselves without government intervention, after China scrapped a regulation that capped spot thermal coal prices in December 2012.

A record high of 955 million tons of coal will be supplied in 2014 through contracts signed during the eight-day trade fair, China Taiyuan Coal Transaction Center said in a statement published on Friday. 

Price flexibility

Only a few coal miners signed fixed-price coal supply contracts with buyers during the trade fair, according to media reports and industry watchers.

Datong Coal Mine Group set the long-term contract price of 5,500-kilocalorie thermal coal at 598 yuan per ton ($98.5), slightly lower than the latest benchmark Bohai-Rim Steam-Coal Price Index (BSPI), Shanghai Securities News reported on Wednesday.

A large proportion of deals that have been signed so far only set the volume of the coal supply, while the prices are yet to be decided, Liu Dongna, an analyst at commodity consultancy Sublime China Information, told the Global Times on Thursday.

"As the deadline for negotiations set by the National Development and Reform Commission (NDRC) is the end of this year, many coal firms and power utilities had preliminary talks and are not in a hurry to reach a deal," she said.

Hong Kong-listed China Power International Development Ltd announced on December 6 that it had signed three-year agreements with two companies, Huainan Mining and China Coal Energy. The agreements only set the volume of the annual coal supply, and states the purchase price will be negotiated by both parties with reference to factors including the current coal prices of the local coal exchange or market, the quality of the coal and the transportation fee.

"Coal firms are inclined to set prices in accordance with the BSPI, which has been gradually accepted by power companies," Li Ting, an independent coal industry analyst in Taiyuan, told the Global Times on Thursday.

The BSPI rose for a 10th consecutive week to 622 yuan per ton as of Tuesday, reversing a trend of decline since the beginning of the year, which analysts attributed to growing coal demand in winter and power generators' efforts to replenish their inventory.

However, there are also suspicions that big coal firms have deliberately raised coal prices.

"The consecutive rise of the BSPI has been partly attributed to manipulation by big coal firms, so they can demand high prices when negotiating with power companies," Wang Xufeng, an analyst at Shanxi-based Fenwei Energy Consulting Co, told the Global Times on Thursday.

For instance, Shenhua Group, the largest coal company in China, started negotiations with power generators on Friday, according to Wang. Just before the negotiations started, the company raised its weekly coal price by 14 yuan per ton on Thursday.

Cheap imports

The cost of coal accounts for nearly 70 percent of thermal power plants' production costs, so lowering coal prices is important for their profitability, Wang Lin, vice president of power generator China Datang Corp, said in a statement posted on the company's website on December 13.

Although coal-fueled power generators' business situation has improved this year, the debt-to-asset ratio of China's five top power generators stood at 84.3 percent by the end of October, Wang Zhixuan, secretary-general of the China Electricity Council, said at the opening of the trade fair on December 12.

Power generators have generally held the superior position in the negotiations, as the domestic coal market is likely to face oversupply again in 2014 and utilities can also depend on cheap imported coal, industry watchers said.

China imported coal totaling 290 million tons in the first 11 months of 2013, up 15.1 percent from a year earlier, and the average price of imported coal dropped by 11.7 percent year-on-year to $89.2 per ton during the period, according to the latest data from the General Administration of Customs.

"Coal imports increased significantly month-on-month in November after domestic coal prices began to rebound in October," Wang from Fenwei Energy said. "As for coal-fired power generators in southern and eastern China, the price of imported coal is lower than for domestic coal."

Global coal demand will grow at an average of 2.3 percent per year to reach almost 9 billion tons in 2018, and China will account for roughly 60 percent of that growth despite government efforts to encourage energy efficiency and diversify methods of electricity generation, the International Energy Agency said in its annual Medium-Term Coal Market Report released on December 16.

Let the market decide

In a statement it released on December 10, the NDRC encouraged coal suppliers and power plants to sign long-term contracts with a period of at least two years, and required local authorities not to intervene in setting contract prices.

Before China liberalized its thermal coal pricing scheme, term contracts were signed every December, under which coal suppliers had to sell a certain amount of coal to power firms at preferential prices that were far below market rates. The purpose of this was to help power plants ease their cost pressure, as the government caps electricity prices.

Under the old mechanism, power firms and power generators often failed to reach agreement in their annual year-end negotiations if there had been significant fluctuations in coal prices. And even for those contracts that had been signed, the default rate was high, said Liu from Sublime China Information.

The role of the annual negotiations has gradually changed, Liu noted, and they now serve as a platform for the two sides to guarantee sales and transportation capacity for the next year, while the prices are adjusted on a more frequent basis to better reflect market conditions.

"This year's negotiations have been held in a calmer manner, signaling that market forces are working in the coal sector," Li said.

China's on-grid price of thermal electricity will be further lowered by 4 percent in 2014 following a cut of 3-4 percent by the NDRC in September, as the spot coal price is expected to fall to 540 yuan per ton next year, UBS estimated in a research note published in October.