Contract, market coal prices near even

As China's coal industry sags under the weight of waning demand and mounting supplies, the market price of thermal coal has been falling since May and is now nearly equal to the 2012 contract prices set for the nation's coal-fired power plants, making the time ripe for regulators to scrap the annual contract coal pricing mechanism, experts said Monday.

Annual coal contracts, which obligate coal suppliers to sell a certain amount of thermal coal to power plants at preferential prices, have a long history in China and are inked every year with the coordination of the National Development and Reform Commission (NDRC), the country's top economic planning body, in order to ease the financial pressures faced by power generators.

With regulatory intervention, the coal prices laid down in these annual contracts are typically much lower than market prices. After the NDRC announced that contract prices could increase by a maximum of 5 percent this year above last year's benchmark price of 575 yuan ($90.41) per ton, coal suppliers and power plants signed sales contracts at around 603 yuan per ton in December.

"At that time, the gap between contract prices and market prices was nearly 260 yuan," Zhang Zhibin, a coal analyst at JYD Online Co, a commodity consultancy, told the Global Times.

Yet, given the slowing economy in China, weaker demand from downstream industries has seriously hit the coal market, which has seen coal prices drop by roughly 20 percent over the past three months.

"With 5,500-kilocalorie thermal coal offered at 620 yuan per ton at Qinghuangdao Port today, deals are likely to be concluded at 605 yuan to 610 yuan after negotiation, very close to the price levels in the annual coal contracts," Zhang said.

As the spread narrows, the NDRC may axe this contract pricing system, the 21st Century Business Herald reported last week, citing an unnamed source close to the matter.

"It is an excellent time to solve a problem dating back to the planned economy. As the difference between contract and spot prices is very small, the impact would be limited for sellers and buyers if the government ends contract pricing now," Lin Boqiang, director of the Center for Energy Economics Research at Xiamen University, told the Global Times.

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