China Agrees on Plan to Cap Coal Price to Ease Power Crisis

(Bloomberg) -- China plans to limit the price miners sell thermal coal for as it seeks to ease a power crunch that’s prompted electricity rationing and even caused a blackout in a major city last month. 

Beijing aims to set the price of its most-popular 5,500-NAR grade coal at 440 yuan ($69) a ton at the pithead, according to people familiar with the situation, who asked not to be identified as they aren’t authorized to speak publicly. That price, which includes taxes, is a target rate, and there will be an absolute ceiling at 528 yuan, the people said.

The plan, which is scheduled to last until May 1 next year, is pending approval by the State Council, and could be revised, according to the people. Beijing also wants downstream sales prices to be controlled, though it will let local governments set standards to limit the price of local coal trading, the people said. Coal importers will obtain subsidies to balance their losses, they said.

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The 440 yuan price target will likely apply to term supplies from coal mines to key users like power plants in order to ease generators’ cash flow tightness and help boost electricity output, said Jia Zheng, a trader with Shanghai Dongwu Jiuying Investment Management Co. The guidelines for market prices, which are decided by local governments, might be set at higher levels, she said.

“The bilateral pricing policies could ensure the coal supplies and prices for power plants and still provide incentives to coal mining production at the same time,” Jia said. The price cap means that coal will be delivered to power plants at an acceptable level of 800 yuan a ton, she said. 

The National Development & Reform Commission, the top economic planner that’s in charge of energy prices, didn’t respond to a phone call and a fax inquiry seeking comment.

Government Intervention

The energy crisis that’s engulfed the world’s second-largest economy started in part due to skyrocketing coal prices, which caused almost all coal-fired power plants in the country to run at losses. Zhengzhou’s benchmark coal futures rose to a record above 1,980 yuan a ton earlier this month, while spot prices soared even higher.

The surges in the both futures and physical coal markets triggered immediate intervention by the country’s central government. Action by authorities to curb those gains, and to help miners boost supply, have had an impact, with futures tumbling by about a third in the past week.

The NDRC is studying plans for a “price formation mechanism to guide the long-term stability of coal prices in a reasonable range,” it said Tuesday in a statement. Officials are already carrying out work to assess average production costs and help set a benchmark rate.

The 440 yuan level was based on a 300 yuan estimate of the physical costs of mining the coal and transporting it to the surface, and labor and other costs accounted for more than 100 yuan, according to one of the people. That would cover the cost of operations in most mines in the country.

Coal is a tightly state-controlled industry in China. Setting a cap on prices is unlikely to harm output as Beijing has ordered miners to maximize supplies, which they will do no matter the cost. China Shenhua Energy Co. and Yanzhou Coal Mining Co. tumbled in trading in Hong Kong on Wednesday.

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