Bucking and haggling between coal and power generating firms over coal prices in recent years has been pushing the government to initiate reforms in its coal pricing system.

In addition to working to liberalize prices and encourage long-term contracts in the coal business, government authorities have begun the work of establishing a national trading center. On the logistics front, the government is also moving to clear up the industry's circulation sectors and improve distribution bottlenecks that typically result in overcharge. In another attempt at amelioration, the government has been pegging the price of electricity to fluctuations in the price of coal.

These and other transformations underway in the coal industry are aimed at achieving greater stability in the country's coal supply and protecting the health of the economy.

The stand-off between coal and power companies is at the root of disruptions in the nation's coal supply that authorities say has contributed to a chronic power crunch in across the country over the past two years.

To settle the costly coal feud, the government says it will phase out its decade-long national coal ordering fair over the next three years.

The fair is the annual conference where Chinese power generators come together to broker deals on half of the nation's coal supply for power-generating for the coming year.

But since 2002 when the government first began to liberalize coal prices for power generation, the fair has always ended up in a chaotic mess, with coal companies demanding more money from generating firms, and the power providers walking away from the bargaining table complaining that they cannot pass on the fuel cost rise because of existing government caps on electricity rates.

To break the impasse between coal-producing and power-generating parties, the government has suggested what it considers fair prices for both sides but has not as yet been able to achieve the co-operation it is seeking.

Government officials remain convinced, however, that long-term agreements between the colliers and generating plants should replace the fair as the industry's bargaining mechanism, reasoning that annual fluctuations in consumption and production would be better-addressed in smaller-scale business dealings.

As a corollary to this, the government is studying setting up a national trading center to facilitate its new plan for better deal-making.

New and better railways across the nation are also doing their part to balance the equation between coal suppliers and firms in business of power-generating. "With the improvement of the railway transportation, the government will less intervene in price setting," says Liu Zhenqiu, deputy-director of the pricing department of the National Development Reform Commission (NDRC).

There are some signs that the relationship between coal and power providers may be entering a new era. Significantly, many power companies moved to long-term contracts after the asking price for Chinese coal soared last year.

Huaneng International, China's largest independent power producer, signed three long-term coal supply contracts last year to secure 92 million tons of coal over the next four years.

Thanks to hat trick of the three long-term contracts, the fuel cost increase of Huaneng is much less than their local peers this year, according to Stephen Oldfield, executive director at Goldman Sachs.

Oldfield says that Huaneng Power International has upped its contracted coal supply to 85 percent of its consumption this year from less than 60 percent in 2004.

The increase in long-term contracts reins in market prices in the power-generating business over the long term.As for the short term, the government is also set to roll out its long-awaited "coal-electricity pricing linkage" mechanism,which it sees as a piece that will better fit the coal pricing puzzle. .

The mechanism allows the power companies to float the on-grid electricity rate to cover 70 percent of the coal cost hike. That will help liberalize coal prices, as the fuel cost fluctuation can be passed on to end-users.

Government officials indicate the mechanism will launch sometime next month.

"The mechanism will mitigate the acute conflict between coal and power sectors," says Xie Juchen, general manager of Zhongneng Power Industry Fuel Company. Zhongneng helps major power conglomerates to procure coal.

Analysts expect the thorny relationship between coal and power companies to ease incoming months along with the domestic coal crunch.

A measurable slowdown in power consumption growth and improved transportation will help loosen the supply bottleneck.

But some places in East and Central China may still suffer from power shortages at times.

"The coal supply remains tight, but, in general, the situation is better than last year," says Xie.

"The market is transforming short-of-supply to a relatively balanced market."

Signs are generally pointing to a market that is turning sluggish and yielding an oversupply.
 

Source: China Daily