China moves to guide coal prices within reasonable range

China's top economic planner is moving to improve the price formation mechanism in the coal market to guide price movements within a reasonable range as the country seeks to ensure stable energy supplies.

In a circular released Thursday, the National Development and Reform Commission (NDRC) put the relatively reasonable range for the medium and long-term trading of 5,500 Kcal thermal coal at Qinhuangdao Port at 570 yuan (about 90 U.S. dollars) to 770 yuan per tonne.

In full considerations of logistics and production costs, the NDRC accordingly proposed the ex-mine prices for medium and long-term trading in major coal production areas including Shanxi, Shaanxi and Inner Mongolia.

"Proposing a reasonable range is not to adopt government pricing for coal, but to establish a range regulation mechanism on the basis of market-formed prices," NDRC official Wan Jinsong explained, saying the move could enable better combination of the roles of the market and the government to avoid drastic ups and downs in the market.

The new policy comes after surging coal prices last year prompted China's coal-fired power stations to reduce their output to avoid losses because of official caps on electricity prices, resulting in power outages that halted factory production.

Thermal power still takes up a large share of China's energy output, accounting for about 70 percent of the country's power generation.

Although authorities have since managed to cool down the coal price rally through a slew of measures, calls are growing for an improved mechanism to rein in drastic fluctuations.

To ease the risk of a further power crunch, in October last year, the NDRC improved the pricing mechanism for coal-fired power, adjusting the floating range of the market-based electricity transaction prices to 20 percent in either direction, compared with the previous ceiling of 10 percent and the floor of 15 percent from the benchmark price.

The market transaction prices of coal-fired electricity for enterprises with high energy consumption are not restricted by the ceiling of 20 percent upward fluctuation.

The latest move to range-guide coal prices should help enable the smooth transmission between coal and electricity prices, while tackling the persistent conflicts in the two markets, according to NDRC official Peng Shaozong.

Thursday's circular pledged to enhance the country's capacity to balance supply and demand, strengthen market supervision to prevent improper interventions and timely investigate illegal market practices.

The new mechanism sends a clear signal on the government's regulation of coal prices, which will guide market expectations for upstream and downstream industries and deter speculation, noted Peng.

He predicted coal prices would see a reasonable retreat from the current level.

Coal output and market supplies are now remaining largely stable, with daily production stabilizing at over 12 million tonnes and stockpiles at power generators at an elevated level.

As China's coal self-sufficiency rate exceeds 90 percent and the relationship between upstream and downstream sectors remains stable, China has the conditions to guide coal prices to operate within a reasonable range, said Wan from the NDRC.