Chinese power producers may have to pay as much as 8 per cent more for their coal in 2006, a third year of record prices, after buyers and sellers were allowed to negotiate and set contract prices.

Producers were asking for an average increase of 20 yuan (US$2.50) a metric ton for this year's supplies as the government removed a limit on prices, Xie Juchen, head of Zhong Neng Power Industry Fuel Co, said in a telephone interview in Beijing on Thursday. Xie's company buys coal for about half of China's power plants.

"Power companies can't pass on higher costs of coal as quickly and are reluctant to agree to higher prices," Xie said. "They are still holding out for steady prices this year to keep profitability after fuel prices surged."

Coal prices in China, the world's biggest consumer and producer of the fuel, increased in late 2004 because of rising power demand. Transportation bottlenecks in the rail network in 2004 prevented efficient delivery of coal and bolstered prices, increasing costs for the nation's electricity generators and led to power shortages.

The National Development and Reform Commission, the country's top economic planner, on December 27 removed a limit on the price of coal, allowing buyers and sellers to set annual contract prices. The commission in August last year limited fluctuations in the price to 8 per cent higher or lower than a benchmark rate.

Coal suppliers and buyers are continuing talks for annual supplies next week after failing to reach price agreements during 10 days of talks held from January 1 to January 10 in the eastern city of Jinan in Shandong Province.

The companies are "hopeful" of reaching final agreements on prices after the week-long Lunar New Year holidays, Xie said. Power companies may sign for about 600 million tons of coal under annual contracts this year, he said. China's week-long Lunar New Year holiday begins January 29.

Source: China Daily