China’s coal-price band to benefit power producers more than miners – Fitch

China’s introduction of a new “reasonable” price range of CNY570-770 per tonne (t) for 5,500kcal/kg coal at Qinhuangdao (QHD) Port will benefit power generation companies (gencos) more than coal producers, Fitch Ratings said in a new report.

The price band was introduced by the National Development and Reform Commission (NDRC) on 24 February 2022 and will be effective from 1 May. The range is set for long-term coal supply contracts. The NDRC also encouraged power gencos to purchase more coal via long-term contracts, which can help to reduce earnings volatility for both the coal and power sectors.

Gencos are likely to benefit more from the price guidance as a floating power-tariff mechanism is in place to effectively pass through higher costs to customers, Fitch Ratings said.

“We believe a higher proportion of long-term coal contracts will help to stabilise the earnings of coal producers and gencos. The NDRC proposed that long-term contracts cover 80% of mines’ production capacity and all of gencos’ consumption of domestic coal. However, we expect that target to be tough to reach in 2022 due to the big gap between the NDRC’s price range and current spot prices,” Fitch analysts said in the report.

The new price range has a higher midpoint than the previous “green” price range of CNY500-570/t set by the NDRC at end-2016, which they said reflects the much-improved supply discipline that will favour higher prices in the medium term. We expect higher coal prices to allow most Chinese coal producers owned by provincial governments to generate higher and more stable operating cash flows than in the last decade.

However, these producers’ deleveraging will be hindered by elevated maintenance capex and large interest costs, the report said.

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