China has lowered the price cap for thermal coal contracts signed between domestic suppliers and utilities to offset shortfall of imported coal as emergency replacement, according to a notice issued by the National Coal Exchange Center on September 7.
The new rule covers a narrower floating range for contract prices, with the ceiling revised to 1.25 times of annual term contract price from previous requirement for 1.5 times in May.
The pricing principle stayed unchanged, namely 50% of annual contract price + 50% of spot price, which could be determined and carried out on a monthly basis, according to the notice. The requirement for contract volume also wasn’t adjusted.
And relevant punitive measures for enterprises that violate the rule since August were also specified in the notice.
The change was regarged as Beijing’s tougher attitude in boosting replacement of coal import, which has been facing great volatility in both supply and prices since this year, with domestic term contract coal, as domestic coastal power generators felt difficulties in inking related term contracts with producers or securing cargoes even with contracts.
Taking China Resources Power as an example, the major owns 37 coal-fired power plants and 4 gas-fired power plants nationwide, with equity installed capacity of thermal power at 32.556 GW, accounting for 67.8% of the company’s total capacity.
However, the company said its ability to guarantee term contract coal supply is weak due to a lack of self-produced coal sources. Moreover, the company’s thermal power plants have undergone large operating pressure as they are mainly concentrated in the Yangtze River Delta and Pearl River Delta, with long material transportation distance and high logistics costs.
As the water level has dropped due to continuous drought in the Yangtze River Basin, it is increasingly hard for large vessels to dock at ports, affecting supply of coal and forcing a switch in transport modes.
Some long-term contract supply and imported coal emergency replacement contracts cannot be effectively fulfilled due to tight railway capacity at some specific time and regions, China Resources Power stated.
Besides, some supplementary coal contracts saw changes in conditions, including the delivery term. Coal suppliers required cargo delivery at mines but buyers faced restrictions in shipment by themselves, like the bank account and railway capacity allocation, according to the company.
The power major’s coal imports fell 35% year on year in the first seven months, and part of the decline was filled by the supplementary domestic coal supply under the guidance of the National Development and Reform Commission.
Although the top economic planner has carried out some measures to effectively rectify the market order, there are still some outstanding difficulties. Some private coal enterprises refused to renew their outsourcing contracts even after China Resources Power reported the situation to relevant authorities.
Huaneng Power International, the leading thermal power generator, has faced the same difficulty.
The company pointed out that policies such as full coverage of medium- and long-term coal contracts and price mechanism have not been fully implemented in some areas, and performance of the term contracts for imported coal emergency replacement was hard to significantly improve, while coal prices hovered at high levels.
The robust spot coal prices recently indicated the supply in spot market remained tight, although industrial power consumption still logged limited growth and residents also reduced electricity use alongside the end of summer peak season.
Besides, as winter typically registers higher coal burning demand than in summer, the peak restocking period of September-October will be key for energy supply in winter.
Note: This article has been exchanged under the article exchange agreement between CoalMint and Sxcoal.
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