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Coal producers, power companies at odds over prices

By Yu Tianyu (China Daily)
Updated: 2009-01-19 07:45

Chinese coal miners and power generators experienced an extraordinarily chilly winter in 2008 as power companies incurred 70 billion yuan losses due to rising fuel costs and luckluster electricity demand, said Xue Jing, director of the department of statistics and information under China Electricity Council (CEC).

According to a source with one of China's five leading power companies, the country's five biggest power generators posted losses of 26.8 billion yuan from January to October.

At the same time, beginning last August, China's domestic coal prices dove along with the country's demand for the fossil fuel.

According to statistics, the average coal price in China fell by 30 to 40 percent in November, compared to the middle of the year. The coking coal price dropped 1,000 yuan, a 50 percent decline.

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The annual coal prices negotiation conference was held in the end of December in Fuzhou, Fujian province, reflecting the tricky relationship between Chinese coal miners and power generators.

Each year, China's coal producers and power companies sit together to negotiate next year's coal prices and it has long been a bone of contention.

After the one-week conference, China's five leading power companies were back without any agreement with coal miners on annual supply contracts in 2009 as they are unwilling to concede the miners' demands for higher prices.

Coal price

The country's five biggest power-generating companies, including China Huaneng Group, China Datang Corp, China Guodian Corp, China Huadian Corp and China Power Investment Corp, had sought a 50-yuan per ton price cut from the term prices in 2008.

But, coal companies wanted to increase term prices by 4 percent in 2009 to pass along their higher taxes and other rising costs.

Coal companies were set to sell 840 million tons to power producers at the annual conference. Consequently, only about half of the coal offered by the miners was sold.

Analysts said previously China's power generators are not unduly worried over fuel supplies next year as they have adequate coal stocks and the railway capacity is abundant.

But now, the conflict between Chinese coal miners and power generators is becoming even more complicated.

Recently, the coal supply of Beijing Huaneng Thermal Power Plant was cut by its supplier, Shenhua Group, and the supply then resumed after government intervention, according to a report by the National Business Daily.

But the Huaneng plant wasn't the only one hurting for coal; similar situations have been reported at other thermal plants.

An official from a power plant in Hebei province said their coal stockpile has declined and only can sustain 10-day production.

He added that many Chinese power plants have similar stockpiles.

According to statistics, coal stockpile at Qinghuangdao port declined to 5 million tons on Jan 6, a 45.2 percent decrease compared to the peak of 9.2 million tons on Nov 16, 2008.

It caused an immediate price rise. At Qinghuangdao port, price of 5500-kilocalorie quality coal from Shanxi province reached 580 to 610 yuan onof Jan 9, a 20-yuan decrease compared to previous week.

Some industry insiders said as coal stockpiles keep declining, the five electricity giants might compromise and sign the contracts.

However, an official from one of five leading power generators told the National Business Daily, if they don't have coal in storage, they can choose to shut down their power-generation units because it is also difficult to sell electricity now.

In China, there are strong ties between coal miners and power generators. Over 60 percent of power generation capacity belongs to coal-fired plants and also power generators are the largest coal consumers, accounting for over 50 percent of the country's coal sale.

Electricity price

But, compared with the coal prices, which are more market-oriented, China's electricity prices are still controlled by the government. That's the core of the conflict between coal miners and power generators.

In 2002, the country scuttled government controlled coal prices, and insisted on market-oriented coal prices.

"However, they didn't consider that there was a great surplus of coal for power generation and a weak demand of coal at that time due to the impact of 1998 Asian Financial Crisis," said Han Xiaoping, an energy analyst with Beijing Falcon Pioneer Technology Co.

In a good economy coal supply and transport capacity couldn't satisfy the country's increasing coal demands and prices kept growing, Han said.

However, now facing the sudden economic slowdown, both coal miners and power generators are unprepared to act, he added.

Because the power generation capacity has increased as power generators are still investing and constructing, high coal prices have seen Chinese power generators experience great losses.

Han said power generators have to bear the burden of high coal prices and also have to repay the loans. But in the current economic situation, they have no way of escaping the pressures.

Huang Shengchu, president of Beijing-based China Coal Information Institute, said the government needs to make efforts to improve its coal pricing mechanism and set up a coal price index.

China has no index to guide investment in the coal industry and power generation industry and Huang said, such a barometer is needed in order to prevent blind production of some coal enterprises and power companies, and also to standardize market orders.

As to the future trend of the conflicts, a report by Bank of China (BOC) International (China) Ltd said: " It is possible that the National Development and Reform Committee (NDRC) will get involved in the negotiations."

In 2005, the NDRC allowed a maximum price rise of 8 percent on steam coal five months after coal companies and power generators failed to reach an agreement.

NDRC officials declined to comment on the current situation.

The State Electricity Regulatory Commission has pledged to reform the electricity pricing system and carry out reforms in the whole power-generation industry this year.

It has said it also will make an effort to solve conflicts between coal prices and electricity prices.