On September 13, the National Development and Reform Commission’s (NDRC’s) official website notified the guidelines power generating companies will have to follow to avail of direct insurance and full coverage of medium and long-term coal contracts, as reported by the Securities Daily.
This is being done to ensure that power utilities can avail of the coal required and sustain their bottomline to ensure employees’ livelihood is not impacted.
The guidelines require that on the basis of the medium and long-term contracts that have been signed this year, power and heating companies and coal companies will increase the proportion of medium and long-term contracts to 100% of annual coal consumption.
The increase to 100% full coverage will further meet the coal demand of coal-fired power companies while reducing the cost of coal especially in the heating season.
Thermal coal consumption for generating electricity and heating accounted for 69% of the overall consumption last year, while in the heating season (October 2020-March 2021), thermal coal consumption for electricity and heating accounted for the total consumption.
However, about 70% can be fully covered by the current supply level.
Since the beginning of this year, companies have stopped production due to power supply shortages in many parts of the country. The winter heating season is about to enter. The contract’s proportion of annual coal consumption has increased to 100%, indicating that the country has further strengthened the guarantee of the supply of heating coal.
Pressure on coal prices
Many analysts feel that although the coal sector remains strong under the linkage of stocks and futures, in the medium and long terms, the pressure on coal prices is obvious.
Since the beginning of this year, the production capacity in Inner Mongolia has been limited while demand for thermal power has been strong, and the overall supply and demand pattern of thermal coal has been tight.
However, since August, the NDRC has introduced a series of measures to ensure supply and price stabilisation, as a result of which supply has increased significantly and is expected to further rise especially after mid-September.
The resumption of production in Inner Mongolia’s open-pit coal mines and the release of new production capacity will ensure supply. Therefore, supply of electricity and coal are expected to be eased.
Experts pointed out that, overall, the policy of full coverage of coal medium and long-term contracts has not only preserved people’s livelihood, but also used the market economy to adjust the current high coal prices, while avoiding impacting livelihood of people dependent on the coal industry.
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