China may scrap coal contracts; open up way for further imports

China's economic agency has put forward a plan to scrap annual thermal coal contract systems that forces miners to sell set amounts to power companies at fixed prices.

The National Development Reform Commission's (NRD) plan is just the latest in the ongoing liberalisation of China's coal market, and may precipitate an jump in imports as domestic prices will no longer be forced to remain low, according to Reuters.

It was submitted earlier this week, and potential approvals are expected to come in December, ahead of the industry's annual coal contract conference.

They will need to approve it before we start the annual contract conference, which is normally held in early December," a source from a state owned coal miner told Reuters.

"The main aim is to open up the coal market and it is now a good time to do so because spot prices have fallen sharply and are converging with term prices."

Previously the NDRC and China Coal Association gathered together coal miners to sign an agreement where they would supply coal at well below market prices.

This year it saw prices set at approximately 570 yaun per tonne despite spot prices sitting at 800 yuan, ensuring that power stations had more than half their annual supply at affordable rates.

However when the spot price rose many miners either neglected to provide the agreed upon amounts or simply supplied poor quality coal.

Ye when spot prices fell below the term rates power stations defaulted on their contracts and bought it at the lower rate, hitting many of these miners hard.

Coal spot prices have suffered over the past six months.

According to PricewaterhouseCoopers "coal miners have been hit with falling prices and higher operating costs this year while only achieving steady production volumes on the previous year".

However coal isn't dead yet, according to Foster Stockbroking.

"The majority of coal producers share prices have diminished ~40% over the H1 2012, while existing explorers and developers have plummeted ~60-80% over the same period," they said.

But despite the downturn Foster analysts said there were indications the coal market had leveled and was "about to turn a corner".

Analysts said natural gas prices in the US had hit seven month highs and had climbed "a whopping 65 per cent over the last three months," which would force some operations to switch back to coal for energy.

They also said reduced production in the US had reduced stockpiles, and while new projects were not as common deals were still being done in mergers and acquisitions.

Finally Foster said underlying demand for coal from China and India was still strong and closely linked with population growth and industrialisation. 

The implementation of this new plan and the rise of coal is likely to see strengthening of the Australian coal market and the stem of job losses and cost cutting that it currently rampant throughout the industry.

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