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China urges power firms to sign long term contracts with coal miners

(Reuters)
Updated: 2016-04-08 10:54
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    China has asked state-owned power plants to negotiate long-term supply contracts with coal producers in a bid to stabilise the market and ease pressure on the country's loss-making miners, according to a draft document seen by Reuters.

    The document was sent to major coal buyers in the power sector and coal producers by State-Owned Asset Supervision and Administration Commission (SASAC) in advance of a meeting due to take place on Thursday between both sides.

    The government is trying to manage the decline in its huge coal sector, which is suffering from falling demand and a concerted state effort to cut pollution and greenhouse gas emissions.

    With an annual capacity surplus of around 2 billion tonnes, China plans to shut down around 500 million tonnes of coal production in the coming three to five years. The government has held regular meetings with miners urging them to maintain "discipline", curb production and avoid price wars.

    According to a draft document the big five state power groups and major state coal suppliers like the Shenhua Group and the China Coal Group have been asked to agree to a plan boosting "long-term stable cooperation" between the sectors.

    SASAC has urged state coal and power firms to sign long-term supply contracts as well as maintain "market discipline" as part of the plan.

    A mechanism to allow upstream coal suppliers and downstream coal consumers to share market risks more fairly should be established, it said.

    Coal and power firms traditionally meet at the end of each year to agree prices and supply volumes for the following year, leading to tense negotiations and frequent stand-offs between the two sides.

    New guidelines were introduced by regulators in 2014 to allow them to set volumes only and give the market a greater say in pricing.

    Chronic oversupply and a collapse in prices, has resulted in power firms buying more from the spot market in recent years.

    Tensions have recently been rising between the two sectors, with one coal firm complaining last year that power plants had been playing suppliers off against one another in order to force prices down further.

    Huadian Power International Corporation, the listed unit of the Huadian Group, one of big five state utilities, posted a 21-percent rise in net profit last year, while the Chinese coal sector was struggling with heavy losses and widespread closures.

 

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