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Tough talks expected at coal contract negotiations between Chinese producers, utilities

Major Chinese miners might look to boost thermal coal prices ahead of the annual contract negotiations for 2015 with utilities next week, but utilities are expected to bargain hard as demand remains muted amid high stockpiles, industry sources said this week.
Leading coal producers including Shenhua, China National Coal and Datong Coal Mine will negotiate with major thermal utilities on contract prices and volumes at Xi’an, capital of Shaanxi province, over November 28-29, China National Coal Association said earlier this week.
Major Chinese miners typically raise their thermal coal prices late in the year ahead of the annual term talks and seasonally higher winter heating demand.
Last winter, China’s top miners pushed up coal prices by more than Yuan 100/mt, with the FOB price for 5,500 Kcal/kg NAR coal traded at Qinhuangdao port hitting as high as Yuan 635/mt in late December.
But this year, led by Shenhua, major Chinese miners have so far raised their thermal coal prices by about Yuan 50/mt ($8.17/mt) since August, following the government directives aimed at controlling domestic production and boosting prices.
This week, Shenhua is offering 5,500 kcal/kg NAR and 5,000 kcal/kg NAR coal at Yuan 514/mt and Yuan 454/mt, including value-added tax, on a FOB Qinhuangdao basis for term contract customers.
While anticipating further price increase by Shenhua before the annual contract negotiations, industry sources said that such strategy may fall short of expectations this year as buying activity in the spot market has remained thin, largely because of high stockpiles at power plants.
UTILITIES HAVE UPPER HAND
But this year, utilities appear to be better positioned to gain an upper hand in the contract discussions, given their high inventories and a supply glut in the domestic market, sources said.
Even with a moderate improvement in recent days, capacity utilization at coastal thermal plants remains low — with plants in Guangdong, Shanghai and Zhejiang operating at 60%, Fujian 55%, and Jiangsu 70% — utility sources said.
“At current utilization, we only required 90% of contracted tonnage with large miners,” said a large utility source. “If thermal power demand picks up, we would buy low-priced supply from the spot market.”
While the government’s mandatory cut in use of imported coal has forced some utilities to buy more domestic coal, analysts said top miners are most likely to conclude their annual contracts at “bargain prices” this year, given it is now a “buyer’s market.”
China introduced a swathe of measures to curb imports this year, including the imposition of a 6% import tax on bituminous coal starting mid-October and restrictions on the use of high sulfur, high-ash cargoes beginning next year.
China’s coal imports, including lignite, thermal and metallurgical coal, in October took a beating as a result, falling 17.4% year on year to 20.13 million mt, or down nearly 5% from September.
Still, coal stockpiles are much higher at transfer ports and utilities this year compared with the same period last year. This would cap potential rise in prices and may even pressure down spot prices, traders and end-user sources said.
Data from Zhongneng Power Fuel Co. Ltd. showed that coal stocks of at key power plants across China reached a record high of 98.33 million mt on November 10, up 8.7% from the previous month and 21.1% higher than a year earlier. The stock level was equivalent to 32 days of consumption.
With fewer coal vessels waiting for loading, coal stocks at northern China’s Qinhuangdao port climbed to 6.09 million mt as of November 19, the first time it has surpassed the 6 million-mt mark in four weeks.
Source: Platts