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China tightens coal price controls, shortages stay

China announced stricter price controls on thermal coal used by power plants, but the move is unlikely to help ease serious power shortages caused by tight coal supply.

The National Development and Reform Commission, China's powerful planning agency, set caps on coal prices at key ports at June 19 levels.

Thursday's announcement followed a similar one in late June, when Beijing capped the price of coal sold by mines also at June 19 levels.

The June policy failed in its goal of dampening coal prices so that power plants could afford to generate electricity, since spot market prices were still able to rise. The latest announcement attempts to rectify that.

“The June price cap was useless. This one is not going to work either,” said a Shanxi-based coal trader.

The price cap would discourage miners from producing or selling more coal, which could further tighten coal supply, traders and analysts said.

The NDRC also asked coal producers to fulfil contractual commitments to sell coal at pre-set quantities and grades, according to its website Miners had cut volumes and substituted inferior coal to get around the June policy.

“The price cap would only limit the growth prospects of profit margins of coal miners in the future,” said Judy Zhu, an analyst at Standard Chartered.

“It's the traders that will be hurt.”

Beijing pegged free on board prices for 5,500 kcal/kg grade thermal coal at 860 ($125.90) yuan per ton at Qinhuangdao, 840 yuan at Tianjin and 850 yuan at Tangshan.

That price is 16% below the 1,015 to 1,030 yuan per ton quoted for 5,500 kcal/kg grade thermal coal at Qinhuangdao, China's top coal shipping port.

“It's already hard to get coal even if you offer 1,000 yuan. Hard to imagine anyone would sell for 860 yuan,” said the trader.

“The key problem is there is simply not enough coal around.”

China is facing the prospect of its worst summer power shortages since 2004, as power plants were either unable to secure enough thermal coal, due to insufficient supplies, or unwilling to stock up because of soaring prices.

The price cap is designed to improve margins for power generators like Huaneng Power International, Datang International Power or Huadian Power.

But if honored, the price cap could instead encourage coal exports and discourage imports by keeping domestic prices below international prices, traders said.

“It will not be useful for easing power shortages,” said Chen Liang, an analyst at Ping An Securities.

Although Beijing raised the power tariff in July, to help power plants cope with higher costs, the rise was not enough to offset surging coal prices.

The benchmark spot coal price at Qinhuangdao has more than doubled since the beginning of the year.

Some analysts believe Beijing was more determined to fight inflation than to mitigate an imbalance in supply and demand of thermal coal.

“A price cap does not directly affect demand or supply. The government probably issued such a policy more from a macro-economic point of view, as part of the effort to control overall price levels,” said Standard Chartered's Zhu.

Concerned that increasingly high prices could fuel social unrest, Beijing has made fighting inflation a priority. (Reuters)