Do you know about - China's Coal Pricing Mechanism Needs revision
Recovery Resource Council! Again, for I know. Ready to share new things that are useful. You and your friends.China's coal consumption peak season typically starts before the Chinese New Year. Coupled with the unusual snowstorm in southern provinces this year, coal prices in China shot up furiously within a short period of time at the beginning of 2008.
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In the transit hub of Qinhuangdao, major coal prices reached a narrative high in January 2008, up more than 20% from just a month ago, and such increases are on top of the continued uptrend in coal prices since 2004. Coal is the most leading energy source in China, accounting for 70% of the national energy consumption. Why would the coal price keep going up in recent years?
"Tight balance" between contribute and demand
The coal price trend in China is closely linked to its price forming mechanism. And the reform develop in China's coal pricing mechanism in recent year has shown a clear tendency towards marketization.
In the era of planned economy, coal prices were uniformly set by the government. In 1993, China started to relax sale prices for coal products other than thermal coal, which accounted for 50% of total coal consumption in China, so thermal coal price was still under a dual pricing mechanism of "planned coal" and "market coal". In late 2004, the government announced the "Coal-Electricity Price Linking Mechanism", which allows periodic electricity price increases once thermal coal price increases 5% or more in the past 6 months, and the thermal coal price in turn can be thought about by negotiation between coal sellers and buyers in the market. For discrete reasons, thermal coal price failed to become marketised initially, but the price differentials under the dual pricing mechanism began to converge. In 2007, the 50-year-old law of government organising every year coal order meeting among coal producers, transporters and users was finally removed, and now suppliers and buyers are beginning to independently negotiate prices based on market circumstances, under the government's macro control framework.
Against such a backdrop, the association between contribute and ask has now become the major factor in determining coal prices. From a consumption mix perspective, the electricity, metallurgical, chemical and construction materials industries, which collectively catalogue for 70% of total coal consumption, are the main users of coal in China. In the first three quarters of 2007, outputs from China's coal-fired power, coke, raw steel and cement industries had grown 16.7%, 19.4%, 17.6% and 15% respectively over previous comparable period, far exceeding raw coal yield growth of 11% from the same period. On one hand, the ask for coal had been expanding significantly. On the other hand, the government were mandating the closure of small and medium coal mines and limiting the capacity expansion of coal mines, thus reducing coal contribute growth. And the railway transportation in China has long been a bottleneck for coal. As a effect of all these factors, ask and contribute of coal in China has been in a "tight balance" situation for years.
Coal prices in China started to decline in 1997 and reached a bottom in 2001. The question of coal shortage started to covering in 2004. Although coal producers had been expanding their yield in the following years, with 8.2% growth in yield in 2007 alone, the contribute shortage nevertheless failed to alleviate. Therefore, coal producers in China have made a windfall behalf in recent years, thanks to the ever-rising coal prices.
Experts predicted that national raw coal yield in 2008 would be similar to the level in 2007, with about 2.73 billion tons of production, against an predicted ask of 2.728 billion tons. Although there may be tightness in certain regions and coal products, China's coal market as a whole is predicted to reach equilibrium this year, with coal prices maintaining at a high level.
"Full-cost" reflecting resources scarcity
Not only coal prices in China reflects ask and contribute interaction, they are also beginning to reflect the linked resources scarcity and environmental costs. Therefore, the crystallisation of regulatory costs is another leading surmise for the ever-rising coal prices in China.
Previously, most coal mining possession in China could be acquired with itsybitsy compensation, and costs of safety, environment and rehabilitation had not been included in the normal costing of coal. This not only failed to reflect the true value of resources, but also led to uncompensated resources consumption and unrecovered environmental damage. For many state-owned coal companies, they also had to face patrimony issues such as rebuilding exhausted coalmines and staff re-employment difficulties.
To solve these problems, China began implementing the law of compensated use of mineral resources in September 2006, and the coal business took the reform trial. The State Council began a pilot law of compensated use of coal resources in eight major coal producing provinces, and coalminers had to pay for the exploration possession and extraction rights. Further reforms in resource taxes and resources payment charges are also under contemplation by the regulators in China.
In addition, Shanxi Province, one of the major coal sources in China, is planning to implement a trial scheme for sustainable developments of coal clubs this year. One of the leading features is to levy and construct three funds, namely coal sustainable development funds, mine environmental saving fund and coalmine redevelopment fund. And these three funds, along with mining right fees, will be included into total yield costs of coal from now on. Therefore, in expanding to the yield costs, coal producers now have to factor in environmental, resources, ecology and redevelopment costs, hence the "full costs" of coal production.
The risen costs will no doubt put pressure on coal companies. In the first three quarters of 2007, listed coal clubs in China reported an mean gross margin of 30.31%, down 4.82% from the same period last year, generally because the rise in regulatory costs had exceeded the growth in coal prices in that period.
Non-coal costs
The growth in yield costs is not the sole surmise for the rising coal prices. China has a complicated coal distribution chain, which had become even more high-priced recently, so these non-coal costs are also responsible for the rising coal prices in China. It is understood that sea freight contract prices for coal has increased from 40-50 yuan per ton before 2007 to the current price of 100 yuan per ton.
The "coal-power tension" between coal producers, power generation plants and power distribution networks, which are all acting in their self-interests within the value chain, has long attracted the group attention. While the coal prices continued going up in January this year, the government didn't accordingly growth electricity prices as per the "Coal-Electricity Price Linking Mechanism", due to macro control considerations (on inflation). In this circumstance, the thermal coal price became a tenacious point between coal producers and power producers.
Experts suggested that the revision in coal pricing mechanism in China needs to develop alongside reforms in linked industries such as power generation, railway and ports. Furthermore, China is now facing an upward pressure in normal prices, so stabilising prices and preventing serious inflation will be the main objective for macro control. An sufficient coal price setting mechanism should not only recognize the principle of market economy, but also take into catalogue the government's macro control theme and affordability of downstream industries.
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