China may scrap government-set coal contracts, paper says

China may reduce the government’s role in the thermal coal market by canceling state-directed term contracts signed annually between producers and buyers, Shanghai Securities News said today.

The National Development and Reform Commission, China’s top economic planner, may also let companies negotiate directly with rail authorities for transport needs, the newspaper reported, citing unidentified people. The plan to scrap the annual deals has been submitted to the State Council, or Cabinet, for approval, Shanghai Securities said.

China is trying to liberalize its resource markets from coal to natural gas and oil to promote energy efficiency and improve the profits of state energy companies. The government conducts the coal negotiations and allocates rail capacity every year to control the price of the fuel used to generate electricity for households and businesses.

“The cancellation of contracts from 2013 implies that coal companies will earn more selling on a spot basis,” Helen Lau, a Hong Kong-based senior analyst at UOB-Kay Hian Ltd., said in an e-mail. Contract coal has been selling below spot rates in recent years, she said.

About 20 per cent of thermal-coal supplies were covered under the annual contracts over the past three years, according to Lau. She expects the new framework will encourage more imports from the region.

China Shenhua Energy, China Coal Energy and Yanzhou Coal Mining are Hong Kong-listed units of the nation’s biggest coal producers, while Huaneng Power International and Datang International Power Generation are subsidiaries of the biggest electricity generators.