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 that 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, 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 CNY 575 per tonne coal suppliers and power plants signed sales contracts at around CNY 603 per tonne in December.

Mr Zhang Zhibin coal analyst at JYD Online Company said that "At that time, the gap between contract prices and market prices was nearly CNY 260. 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% over the past three months.”

Mr Zhang said that "With 5,500 kilocalorie thermal coal offered at CNY 620 per tonne at Qinghuangdao Port deals are likely to be concluded at CNY 605 to CNY 610 after negotiation, very close to the price levels in the annual coal contracts.”

Source - Global Times

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