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[SHANGHAI] Chinese coal miners are raising spot prices in a domestic market struggling to recover from seven-year lows, desperate for an edge in annual negotiations to supply power plants, key buyers in the world's biggest consumer of coal, industry sources say.
Discussions on annual contracts for 2015 are being closely watched abroad as any sustained climb in benchmark prices for Chinese steam coal could reignite import demand, after Beijing imposed a 3-6 per cent tax on overseas supplies in October.
And with nearly 70 per cent of China's miners making losses, failure by producers to secure a better term price could push some mid-sized and higher-cost miners out of business, posing a threat to the economic health of coal-dependent regions.
Talks kicked off last weekend in the coal heartland of Shaanxi province.
The benchmark price for Chinese steam coal with a heating value of 5,500 Kcal/kg stood at 521 yuan (US$85) this week, with measures including the introduction of import tariffs dragging it up around 8 per cent from lows plumbed in August.
But that is still down by nearly a fifth from the start of the year, with miners' earnings halved in the first 10 months of 2014 from last year.
"If prices return to 550 yuan, there could be room for Australian imports to flow into China again," said Thomas Deng, an analyst at consulting firm ICIS-C1 Energy in Beijing.
But industry experts say that swollen stockpiles and tepid demand will give utilities strong bargaining power in negotiations, adding that benchmark prices could drop again next year as more production capacity comes online.
"Current (benchmark) prices are not sustainable and could easily fall back to 500 yuan next year. Buyers know that so they don't want to commit," said Zhang Yuan, a coal analyst at Galaxy Futures.
The sources said top miner Shenhua Coal has raised prices by 50 yuan since September to 539 yuan per tonne. Companies sometimes demand prices above the benchmark in hope of driving the market higher.
After increasing their spot prices in recent months, top producers - Shenhua, China National Coal Group, Datong Coal Mine Group and Inner Mongolia Yitai Group - have suggested a 2015 contract price of 510-520 yuan, said sources at two major utilities. Term prices between Shenhua and top utilities were set at about 570 yuan for 2014.
The sources declined to be identified due to the sensitivity of the matter. The four miners did not respond to requests for comment.
PLENTY OF STOCK The National Development and Reform Commission, the country's powerful economic planner, has also intervened, suggesting large utility groups agree to a 2015 term price of 550 yuan a tonne and urging multi-year contracts, the sources said.
"That is an unreasonable number, everyone knows the market is way oversupplied. We have plenty of stock and we will bide our time," said the first utility source, a procurement manager at China Datang Group.
Run rates at coastal thermal plants are hovering at 55-60 per cent, according to data from SXCOAL.com.
Coal stocks at key power plants struck a record of 98 million tonnes in November, equivalent to 33 days of consumption. "At current run rates, we'll need to cut term contract volume by about 10 per cent. Even if the economy picks up, miners still have plenty of inventory," said the source at a second utility.