China to increase coal production

12 December 2016

Major Chinese coal producers have signed long-term contracts with electricity companies at discounted rates, helping to stem the rise in prices amid the prospect of increased output.

Coal mines were permitted to boost production on the condition of signing contracts of a year or more at a government-mandated price of roughly 10% below market rates. This shift in the world’s largest coal-consuming nation is expected to have repercussions for the international market.

A total of 15 coal companies such as Shenhua Group signed contracts with five major electricity providers, including China Huaneng Group. The combined contracted volume apparently totals over 500 million tons, amounting to 15% of China’s annual coal demand. The contracts will set a standard for coal transactions nationwide.

Agreed-upon contract prices are 535 yuan ($77.63) per ton, compared with a high of 607 yuan in early November. Despite lower profits than trading on the market, producers have the incentive to sign in order to gain prioritized access to shipping and looser restrictions on operating days. China has limited annual coal mine operations to 276 days.

The long-term contracts and increasing production have stemmed the surge in prices, which had declined to 598 yuan by Wednesday. Prices will likely “stay between 550 yuan to 600 yuan,” said Wang Xianzheng, chairman of the China Coal Industry Association.

Although it had aggressively limited production this year, China swung to edging up production after projections showed it would achieve its 250 million-ton capacity-reduction goal for 2016. The country’s production capacity was roughly 5.7 billion tons at the end of 2015. With 2 billion tons of surplus, it decided in February to lower capacity by 1 billion tons, which fueled the rise in prices this year.

However, an increase in coal price leads to higher electricity prices, which has spillover effects in a wide range of industries. And indeed, the wholesale price index was seen on a clear upward trend from September. Given the risk of price increases spreading discontent across the country, the government was quick to make a move.

China’s intervention had triggered the price surge in the first place, yet now the government is faced with easing the restrictions it put into place, and forcing major coal producers to sign long-term contracts.

Source – Asia Nikkei