Supply deals inked, but signees might back out for own interests: experts
China's major coal companies signed long-term supply contracts on Thursday at the annual coal trade fair in Qinhuangdao, North China's Hebei Province, a move experts said will stabilize soaring prices and optimize resource allocation.
But they warned that there will be difficulties in the implementation process, as electric power companies may break the contracts if spot market prices fall to their advantage.
Ten leading coal producers, including Yankuang Group, Shaanxi Coal and Chemical Industry Group, and Heilongjiang Longmay Mining Holding Group, struck mid- and long-term contracts with electric power companies and major steel producers at the three-day event, which kicked off Thursday, domestic news portal sina.com reported.
The contracts lay out terms regarding the quality, quantity and duration of the supplied coal, according to a statement released Thursday by the National Development and Reform Commission (NDRC), the country's top economic planner. The terms also cover dispute resolution and price setting mechanisms, under which the actual settlement price is based on a combination of the agreed discounted price to current spot market rates and references to the relevant price index.
The agreements come as Chinese authorities are pushing ahead with coal market reforms, especially with long-term coal supply contracts, in a bid to rein in soaring coal prices.
On Thursday, six government ministries, including the NDRC and the State-owned Assets Supervision and Administration Commission, jointly issued a series of guidelines to incentivize and attract more coal producers into signing long-term supply deals.
Companies that sign and honor such contracts will receive policy rewards, including priority in transportation support and arrangements for releasing advanced capacity, the guidelines said.
Government authorities also plan to build an evaluation system to supervise whether relevant parties fulfill the terms of the contracts, the guidelines noted. Regulators will also introduce third-party credit institutions to establish a complete credit record for producers who inked the long-term deals.
In addition, illegal practices such as "manipulating market prices, lowering prices to exclude competitors, fabricating and spreading false price increase information" will be investigated according to the Price Law. Producers that abuse dominant market positions to buy or sell coal at "unfair market prices" will be penalized according to anti-monopoly laws, the guidelines noted.
Earlier in November, major coal miners such as Shenhua Group and China National Coal Group, signed long-term deals with State-owned power companies at a price that is roughly 25 percent lower than the benchmark Qinhuangdao price.
Fluctuating coal prices
Drawing on international standards, the medium- and long-term contracts "are an effective mechanism to ward off short-term market risks and reduce fluctuations in the market," Han Xiaoping, chief analyst at the energy-focused website China5e, told the Global Times on Thursday, hailing the move as a milestone.
In the past, coal producers and power firms have signed long-term contracts, but they only fixed the amount supplied and relied on the spot market price in actual transactions, Guan Dali, an analyst from the industry portal chem365.net, told the Global Times Thursday. The new contracts, with prices set "within a rational range," are expected to end this scenario and stabilize market expectations, Guan said.
"As coal prices are fixed, companies will develop an understanding of possible revenues and cost, making it easier to control expenditures and optimize the allocation of resources," Han said.
In the long run, with the balance in supply and demand, future booms and busts in coal prices are likely to be eliminated, and prices will return to "reasonable levels" of 550 yuan ($79.79) to 600 yuan per ton, Wang Xianzheng, the head of China National Coal Association, said at the trade fair.
However, experts have expressed concerns over whether both sides can abide by the contracts.
"Coal prices have surged beyond the affordable cost of thermal power generators, and five State-owned electric power firms have reported consecutive profit losses for two month. But what if the spot price falls below the agreed contract price? Will those electric conglomerates break the contract to reap a windfall?" Guan asked.
Coal prices experienced a rapid surge this year, partly due to the various capacity-cutting measures rolled out by the government, which in turn have led to a supply crunch.
In the latest move to reduce domestic coal capacity, the Xinhua News Agency reported late on Thursday that China will suspend new coal mining and processing projects until the end of 2018.
In mid-November, the benchmark Qinhuangdao coal prices rose to an average 700 yuan per ton, the highest since June 2012.
