A group that represents power producers has called for the government to keep coal prices at below market prices, at least for this year.

China Electricity Council (CEC) said government controls should remain in place to ensure the profitability of power generators.

This follows a government announcement on Sunday that it will get rid of price controls for coal used for power generation.

"The government should keep its controls over the supply and price of coal used for power producers, especially in areas where there is a supply shortage." Wang Yonggan, secretary-general of the CEC, said yesterday.

At the annual coal ordering conference that kicked off on Sunday, Ou Xinqian, vice-minister of the country's top economic planning agency, the National Development Reform Commission (NDRC), said that in future coal prices would have to be decided through independent negotiations between buyers and sellers.

The government will still adjust coal prices if they rise by an "obvious margin," the NDRC said in a circular. But it did not elaborate on the exact figure at which it would intervene.

The 10-day annual coal conference will see major contracts signed between suppliers, big power producers, such as Huaneng and Datang, as well as the transport units.

For a long time thermal coal, coal used at power stations, has been traded in China at two prices: the market price and the set price. The set price, arranged by the government, is much lower than the market price, and the gap has widened over the past few years.

The gap between the two prices was as much as 150 yuan (US$18.5) per ton in East China last year, said Zheng Yong, secretary-general of the East China Coal Sales Association.

The recent liberalization of thermal coal prices marks a move towards making energy prices more market orientated, according to industry analysts.

But the electricity association's Wang said the current situation is not mature enough for the government to completely free up controls over coal prices.

"Coal prices on the market have been high, while electricity tariffs are fixed by the government, which has put great pressure on the country's power generators," Wang said. The market price for thermal coal was 480-500 yuan (US$59-62) per ton at the end of last year.

Also, coal supplied to power producers is now of a lower quality, so power firms have had to buy more coal for each unit of electricity generated in comparison with previous years, Wang added.

An official from Datang International Power Generation Co Ltd, one of China's five power majors, said the deregulation of thermal coal prices means the firm will have to pay more for coal this year.

Datang's profit increased by only 0.55 per cent in the first half of last year, while its electricity generation grew by 39.3 per cent to 32.8 billion kilowatt-hours.

"The small profit margin is due to the high operation costs incurred mainly by soaring coal prices," the official said yesterday.

Coal prices, even if the government drops its controls, will not see a big rise, market observers say.

"Coal suppliers and power producers have been very rational in signing contracts, and coal supply is expected to be even better than last year," Zheng said.

Fang Xiu'an, of China Coal Transport and Distribution Association, said coal supplies are expected to remain balanced with demand.

He said the government's mandate to shut down small coal collieries to improve mine safety would reduce output, while macro-controls to slow down investment in some industrial sectors, such as steel and power, would cut demand.

Source: China Daily