The peak season for coal consumption in China usually begins before the Chinese New Year. Coupled with the unusual snowstorm in the southern provinces this year, coal prices in China soared furiously in a short period of time in early 2008.
In the Qinhuangdao transit hub, major coal prices hit a record high in January 2008, more than 20% from just a month ago, and these increases add to the continued upward trend in coal prices since 2004. The Coal is the most important source of energy in China, accounting for 70% of the national energy consumption. Why would the price of coal continue to rise in recent years?
“Tight balance” between supply and demand
The trend of the price of coal in China is closely related to its price formation mechanism. And the reform progress in China’s coal price mechanism in recent years has shown a clear trend towards commodification.
In the era of the planned economy, the government set coal prices uniformly. In 1993, China began to relax the selling prices of coal products other than thermal coal, which accounted for 50% of total coal consumption in China, so the price of thermal coal was still subject to a price mechanism. dual of “planned coal” and “market coal”. In late 2004, the government announced the “Electricity and Coal Price Linking Mechanism”, which allows periodic increases in the price of electricity once the price of thermal coal increases by 5% or more in the last 6 months. , and the price of thermal coal in turn can be determined by negotiation. between sellers and buyers of coal in the market. For various reasons, the price of thermal coal was not initially traded, but the price differences under the dual price mechanism began to converge. In 2007, the 50-year-old government system that used to organize annual coal ordering meetings between coal producers, transporters and users was finally phased out, and now suppliers and buyers are beginning to negotiate prices independently based on market circumstances. , under the framework of government macro control. .
In this context, the relationship between supply and demand has now become the main factor in determining coal prices. From a consumption mix perspective, the electricity, metallurgical, chemical and building materials industries, which collectively account for 70% of total coal consumption, are the main coal users in China. In the first three quarters of 2007, the output of China’s coal, coke, crude steel and cement power industries had grown by 16.7%, 19.4%, 17.6% and 15% respectively during the period. comparable previous, far outpacing crude coal production growth of 11% in the same period. On the one hand, the demand for coal had increased significantly. On the other hand, the government was ordering the closure of small and medium-sized coal mines and limiting the expansion of coal mine capacity, thus reducing the growth of coal supply. And rail transportation in China has long been a bottleneck for coal. As a result of all these factors, the supply and demand for coal in China has been in a “tight balance” situation for years.
Coal prices in China started to decline in 1997 and bottomed out in 2001. The problem of coal shortages began to surface in 2004. Although coal producers had been expanding their production in subsequent years, with an increase of 8 , 2% in production only in 2007, however, the supply shortage failed to alleviate. Therefore, coal producers in China have made extraordinary profits in recent years, thanks to the constant increase in coal prices.
Experts predicted that national crude coal production in 2008 would be similar to the 2007 level, with about 2.73 billion tonnes of production, against an expected demand of 2.728 billion tonnes. Although there may be tightness in certain regions and coal products, China’s coal market as a whole is expected to reach equilibrium this year, with coal prices remaining high.
“Total cost” reflecting scarcity of resources
Coal prices in China not only reflect the interaction between supply and demand, but are also beginning to reflect associated resource scarcity and environmental costs. Therefore, the crystallization of regulatory costs is another important reason for the steady increase in coal prices in China.
Previously, most coal mining rights in China could be acquired with little compensation, and safety, environmental and rehabilitation costs had not been included in the normal cost of coal. This not only did not reflect the true value of the resources, but also led to uncompensated resource consumption and unrecovered environmental damage. For many state-owned coal companies, they also faced legacy problems, such as rebuilding depleted coal mines and staff reemployment difficulties.
To solve these problems, China began to implement the mineral resource compensated use system in September 2006, and the coal industry took the reform test. The State Council initiated a pilot system of compensated use of coal resources in eight of the main coal-producing provinces, and miners had to pay for exploration and extraction rights. China’s regulators are also contemplating further reforms to resource taxes and resource offset charges.
In addition, Shanxi province, one of the main sources of coal in China, plans to implement a trial scheme for sustainable development of coal companies this year. One of the important features is to raise and establish three funds, namely the Coal Sustainable Development Funds, the Mine Environmental Recovery Fund and the Coal Mine Redevelopment Fund. And these three funds, along with mining rights, will be included in total coal production costs from now on. Therefore, in addition to production costs, charcoal producers must now factor in environmental, resource, ecological and redevelopment costs, hence the “total costs” of charcoal production.
Rising costs will undoubtedly put pressure on coal companies. In the first three quarters of 2007, Chinese-listed coal companies posted an average gross margin of 30.31%, 4.82% less than in the same period last year, mainly because of rising regulatory costs it had outpaced the growth of coal prices in that period.
The increase in production costs is not the only reason for the increase in coal prices. China has a complex coal distribution chain, which has recently become even more expensive, so these non-coal costs are also responsible for rising coal prices in China. It is understood that the prices of ocean freight contracts for coal have increased from 40 to 50 yuan per ton before 2007 to the current price of 100 yuan per ton.
The “coal energy tension” between coal producers, power generation plants and power distribution grids, acting in their own interest within the value chain, has long drawn public attention. . Although coal prices continued to rise in January this year, the government did not increase electricity prices accordingly under the “Coal-Electricity Price Linkage Mechanism”, due to macro control considerations (on inflation) . In this circumstance, the price of thermal coal became a hot spot between coal producers and energy producers.
Experts suggested that the improvement in China’s coal pricing mechanism should progress alongside reforms in related industries such as power generation, railways and ports. In addition, China is now facing upward pressure on overall prices, so stabilizing prices and avoiding serious inflation will be the main objective of macroeconomic control. An effective coal pricing mechanism must not only respect the principle of the market economy, but also take into account the issue of macroeconomic control of the government and the affordability of downstream industries.