Related readings:  Shanxi to set up coal exchange

To be located in Taiyuan, capital of northern Shanxi Province, and due to open around 2009, the exchange will create a spot trading platform for coal producers, power plants and other industrial buyers. Shanxi accounts for a third of China's proven coal reserves.

According to local media reports, annual trading volume could reach 500 million tons initially and eventually top one billion tons on the exchange, and will grant China pricing power to match its role as a key trader of the fuel in the global market.

China approved the establishment of the exchange early this month, which industry sources said could be the first official coal exchange in China that will coincide with some private ones.

Chinese power producers, the main buyer of domestic coal, and miners negotiate prices at annual purchase meetings presided over by the central government, a system that survived from the old planned economy.

But with the government finding it increasingly difficult to intervene due to prolonged disagreements between producers and buyers, not to mention a shortfall in rail capacity, China has begun to allow power and coal producers to set prices more freely - provided asking prices didn't get out of control.

Shanxi Governor Yu Youjun last week said coal could be "the last stronghold" of the planned economy in which state authorities, rather than market forces, directly determine prices, output and production.

First phase construction of the exchange could cost one billion yuan (US$130.7 million). The exchange will be formed under a share holding structure to include coal miners, traders and coal users.

Shanxi Province Coal Transportation & Sale General Co, promoter of the new exchange, said it could be "a major breakthrough in the reform of coal transport and distribution in Shanxi and the nation."

However, one industry official said as coal producers usually sign yearly contracts with large buyers, trading activity on the new exchange could be limited. It could also be hard to attract domestic coal importers as such firms are usually based in eastern and southern coastal regions.

A Shenhua Group Corp official said it hasn't decided whether it will hold a share in the Shanxi exchange. Shenhua, the nation's top coal producer, is based in Beijing and most of its output is from the Inner Mongolia Autonomous Region.

Local media said the exchange will be of state level while the Caijing magazine said the central government didn't mention the words "state level" in its approval document.

Industry sources said Qinhuangdao in Hebei Province is also seeking approval for a similar exchange. Qinhuangdao is China's biggest coal port with rail connections to mines.

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