SHANGHAI Nov 27 China's top economic planning
agency has submitted a plan to scrap an annual coal contract
system requiring suppliers to sell certain quantities to power
companies at preferential prices, industry sources said on
The move heralds a big step towards liberalisation of the
thermal coal market in China, the world's biggest buyer of the
fuel, and could trigger an increase in imports since domestic
prices would no longer be kept artificially low.
The move may also free up the electricity markets, where
tariffs are set by the government.
The National Development and Reform Commission (NDRC) has
submitted the plan to the State Council, China's cabinet, and
approval is expected to come within weeks, said two trading
sources who were briefed on the matter.
"They will need to approve it before we start the annual
contract conference, which is normally held in early December,"
said a source at a trading firm under a state-owned coal group.
"The main aim is to open up the coal market and it is now a
good time to do so because spot prices have fallen sharply and
are converging with term prices."
Australia's Newcastle spot thermal coal index
has fallen as much as 30 percent since the start of 2012 to a
year-low of $81 a tonne, largely due to weaker consumption by
China as its economy slows down.
Currently, coal-price contracts are signed every year at an
annual meeting organised by the China Coal Association and the
NDRC, whereby coal suppliers agree to sell certain quantities to
power companies at prices set far below the market rates.
Term prices for 2012 were set at around 570 yuan per tonne,
while spot coal prices were capped at 800 yuan.
The dual-price mechanism, which allows power companies to
secure around half of their annual coal consumption at
preferential rates, has caused headaches for suppliers and power
stations alike in the past.
When spot coal prices were much higher than term rates, coal
miners would either fail to supply the agreed volumes under the
annual contract or send out poorer quality coal.
However, when spot prices tumbled this year and were briefly
below the term rates, many power companies defaulted on their
contracts, which caused miners to incur heavy losses as they
also had take-or-pay contracts with the railway bureau for
Under the proposal, the NDRC will also stop allocating
railway capacity to the coal sector, which means suppliers and
power companies will need to negotiate with the railway bureau
directly, the sources said.
The NDRC will continue to encourage miners to ink long-term
contracts with power companies, the sources added, but will give
sellers the freedom to adjust prices on a quarterly or
(Reporting by Fayen Wong; Editing by Aaron Sheldrick and Miral