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Coal Energy: 48 Hours of Contract Negotiations

Cover, Issue 502, January 10
Translated by Tang Xiangyang
Original article:

Power companies are in need of coal, but coal mines prefer to sell their products to metallurgy companies. The negotiations need a coordinator, but no one is coming forward.

On January 6 at the Marriot Hotel in Nanning City, the 2011 China Coal and Energy Contract Meeting took place. By three o'clock in the afternoon, high-level executives of power companies and coal mines filled the main conference hall. However, officials from the National Development and Reform Commission (NDRC), the Ministry of Railways and the Ministry of Transport, were nowhere to be found.

January 6th was the first coal order placement meeting to take place since the same meeting was cancelled last year.

The central government appointed Zhu Ning, vice general manager of the Zhong Neng Power Industry Fuel Company, as coordinator of the power plant representatives. The focus of this meeting was to individually examine, in accordance with guidelines released by the NDRC, all 2011 contracts between coal mines and power companies.

Zhu Ning introduced the two purposes of the meeting: to ensure the completion of the contracts for 380 million tons of coal and to guarantee that the quantity, quality and price agreed upon in the key contracts are in accordance with NDRC requirements.

The Meeting Recommences

Participants in the meeting included China Coal, Shenhua Group, and officials from the local coal and mining affairs bureau. The coordinator for the coal mine representatives was Li Xin, director of the information department of the Coal Transport and Sales Association.

To those outside the industry, the meeting appears unnecessary. By December 31, 2010, the sales volume of contracted coal had reached over 1.5 billion tons, far exceeding the 932 million tons required by the NDRC.

But faced with "satisfactory" sales figures, the NDRC were not happy. In fact, they were a bit angry.

The maximum sales volume of contracted coal the NDRC is willing to supervise is 380 million tons. (This figure is based on the total amount of coal contracted in 2010 which was over 300,000 tons). The NDRC set the figure as the bottom line, the minimum amount of coal necessary for ensuring adequate power supply for the country.

However, of the contracted 1.5 billion tons of coal reported by the Coal Transport and Sales Association, only 262 million tons were included in the key supervised contracts, meaning that sales contracts for coal signed by power companies fell short of the NDRC’s bottom line by 31 percent.

Discussions over prices in contracts under NDRC's supervision have not made progress. Yet, prices offered by metallurgy and chemical companies are much higher than those offered by power companies, and are therefore the main source of profit for coal mines. The NDRC wants to impose strict restrictions on coal supplied to metallurgy companies because metallurgy is a high energy-consumption sector. The NDRC also wants to ensure the increased usage of coal for power generation.

So far, the NDRC has refused to change transport plans, capacity, and the prices of the key contracts, and further insists that coal mines guarantee another 769 million tons.

Reallocating Coal for Power

The day before the meeting, the Coal Transport and Sales Association suggested that local coal suppliers adjust their contracts.

The Henan Pingmei Group was criticized for not signing the key supervised contract committing 400,000 million tons of coal to a company located in Nanyang City of Henan Province.

"Sign the contract and the accounts of Pingmei Group will be smooth again," said Li Xin, the coordinator for the coal mine representatives.

Another problem in Henan Province was the Henan Yima Coal Group. The group sold a considerable volume of coal, but agreed to only 3.25 million of the 5.65 million tons required by key supervised contracts. Additionally, Henan Yima divided the volume required by the key supervised contracts into separate contracts. For example, the contract with China Electric for 400,000 tons was split it into four contracts for 100,000 tons each.

At the contract meeting, Li Xin declared that dodging supervision by splitting contracts was a serious violation of NDRC regulations. When he brought up the subject, several regional coal representatives smiled knowingly. The contracts will have to be reunified.

The Henan Province representative noted Li's points, and phoned the companies guilty of violating NDRC requirements.

The Coal Transport and Sales Association stressed to coal companies the importance of ensuring the 380 million tons provided in the key supervised contracts. Li Xin suggested that coal mines make the required changes as soon as possible, and that companies guilty of serious violations should submit a report to the NDRC.

Some representatives left the meeting room for the nearby data center. By 4 pm on January 5, those in the data center stated that many of the contracts had already been altered. Some other provincial representatives assembled in the hallway of the hotel and discussed how to explain their large reduction in coal contracts with power companies.

However, amending the contracts was not the primary priority of the power companies. They were focused on prices, exchange rates, and drafting a supply contract with coal mines satisfactory to both parties.

Conflicts Among Power Companies

On the second day of the meeting, the main focus had shifted to contract prices.

The representative of Chongqing's power companies said they were willing to raise the contract price of coal by 110 yuan per ton since Chongqing power companies were not covered by the 2011 framework.

He said, because power companies and coal suppliers have different interpretations of the notice released by the NDRC, it was necessary for NDRC officials to provide onsite coordination.

A representative from the China Power Investment Corporation wondered, if representatives from the NDRC and the Ministry of Railways, the only ones who can clear up "misunderstandings," were not there, why was the meeting still being held? He compared the meeting to a traffic accident that cannot be resolved without the presence of a police officer.

However, an insider stated that those officials refused to attend the meeting because they were afraid to be criticized for "excessive market intervention".

A representative of a state-owned power company said, if the meeting was only focused on coal volume quotas and ignored the prices, power plants would be caught in a "beggars can't be choosers" scenario, and forced to sign contracts as quickly as possible. If this is the case, the prices will exceed the NDRC set price in less than a quarter.

Throughout the meeting, Zhu Ning suggested repeatedly that power plants with complaints about the NDRC price requirements should negotiate with coal companies at the meeting. If efforts at negotiating failed, then the NDRC will act as a supervisor.

She also suggested that power plant representatives sit in during coal company meetings to see whether the prices they are offering are appropriate for the suggested quantities.

But representatives of coal mines refused to share their information with power company representatives.

What worried the power companies even more was that according to guidelines from the NDRC, contracts signed this year may serve as the basis for future contracts. Therefore, the Nanning meeting may have a long-term impact.

Zhu Ning said she did not expect so many disagreements to take place at the meeting. She thought everyone would pretty much be on the same page.

Problems unsolved by the end of the meeting on January 9 will be reported to the NDRC.

Although officials from the NDRC did not attend the meeting, the NDRC required the Coal Transport and Sales Association and the China Electric Power Company to submit a joint-report on the progress of the meeting every night.

This article was edited by Rose Scobie and Ruoji Tang

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