China Shenhua inks coal deals but others drag feet

Exploration & Development

Shenhua Group, China's top coal miner, has signed term coal supply contracts for 2009 with three small power firms who will pay a little more than 10% above 2008 prices, but the country's top five power generating groups remained locked in talks with suppliers.

China's annual thermal coal price negotiations are making little headway as miners and power plants stand firm on their positions, but some smaller power generators, unable to resist pressure from coal suppliers, have concluded term agreements, industry officials said on Wednesday. "Shenhua has signed deals with Yudean, Zhejiang Electric Power Corporation and China Resources," said Liang Dunshi, deputy secretary-general of the China Coal Distribution and Transportation Association said.

Shenhua's term price for coal with calorific value of 5,500 kcal/kg was less than Yu500 (US$73.04) per tonne in 2008, industry officials said. A Shenhua spokesman declined to comment.

Spot prices for the same grade have fallen nearly 45% from their July peak to Yu555-570/t at Qinhuangdao, China's top coal shipping port, while thermal coal price at Newcastle, Australia, a benchmark for Asia, stood at US$77.81/t last week.

China's coal-fired power plants are expected to lose more than Yu70 billion this year as state-set power tariff hikes fail to keep pace with coal costs. Spot coal prices have fallen nearly 50% from their peak in the summer as China's power output declined on the back of dwindling demand from energy-intensive sectors in an economic slowdown. "Coal stocks at the top five power generators have reached record highs, which offer leverage in the price negotiations," said an official at one of the five groups, adding the five will act in unison on signing the contracts.

But Liang from the association said a price hike would be justified as coal production costs will be raised next year by tax policy changes, and historically, term prices have been too low. "It is a good opportunity to straighten up the relationship between term and spot prices," Liang said, adding that power plants should not blame their losses entirely on coal prices. "They should lobby the government to give subsidies or raise power tariffs."

Beijing will raise the value-added tax for mining companies to 17% from 13%, starting Jan 1. The government also is expected to raise the resource tax. "The top five power groups are pretty tough this time, hoping to lower the price by Yu50," said Lu Ping, an analyst from China Merchants Securities.

"The deal between Shenhua and the three firms is not going to be of much reference to them. It's possible that the top five and coal miners would not reach any agreement." In contrast, negotiations on supply contracts of metallurgic coal have been carried out smoothly. "The annual term prices for coking coal are about Yu1,000-1,200/t," said a senior executive at a steel mill, adding that prices will be adjusted throughout the year according to market conditions. Such prices are close to current market prices, Lu of China Merchants Securities said.

(Reuters, Dec 24)