The conflict between Chinese coal suppliers and the country's five major power companies (Huaneng, Huadian, Longyuan, Power Investment Group, and Datang) escalated once again after months of price deadlock. The power companies currently plan to import several million tons of coal from Australia, claiming the price is lower even with freight costs included.

For eastern and southern coastal power plants, using relatively cheaper imported coal has long been a common practice. But this time the purchase of overseas coal is being seen more as a demonstration of intent to the coal companies. Business insiders also point out that low prices in the international market are boosting the power companies' confidence into the bargain.

"Importing coal from Australia, even adding the freight and 17 percent VAT – the price is still 50 yuan (US$7.33) lower than the domestic price," an official with Datang told the press: "The company is still bargaining with Australia, trying to get more coal."

Imported coal cheaper

The five power companies have recently cut a deal with Australia for 1 million tons of 5800 kcal coal, at the price of US$70 per ton (CIF to Guangzhou).

The 5800 Kcal Australian coal is reportedly equivalent to domestic 5500 Kcal coal in calorific value. The Australian coal costs roughly 560 yuan per ton, including VAT. Business data on February 9 shows the cost of 5500 Kcal from Qinhuangdao is 570 yuan per ton – adding freight at 40 yuan per ton, the CIF to Guangzhou comes in at 610 yuan, 50 yuan more than imported coal. Analysts indicate that this will directly affect the northern provinces' coal sales to the southern power plants.

In addition, Datang's officials mentioned that the company contacted other suppliers like Indonesia, Russia and Vietnam earlier this year, and signed some contracts. The agreed price was 10-20 yuan lower than the domestic quotation.

The low price of international coal provides an alternative for power plants which have long been under the thumb of the domestic coal suppliers. Li Chaolin, a market observer from China Coal Market Network (www.cctd.com.cn) adds: "With shrinking global demand, the coal price on the international market is expected to drop further in the near future."

For example, in a recent contract signed between Australia and Japan, the price of steam coal has been set at around US$70-80 per ton (FOB). Compared with a contracted price of US$125 in 2008, this is already a 45 percent drop. Meanwhile Australian exporter Xstrata has set its 2009 export price at US$80 per ton, 50 percent lower than in October 2008.

Will the coal suppliers make concessions?

The five major power companies are planning to abandon domestic coal and launch an international purchasing strategy. Will this force China's coal suppliers to make concessions?

One director of a Beijing power plant says: "Coal producers are easing their stance. Though they haven't decided on a price, they have started to supply coal to order, unlike previously when they refused to supply until formal contracts had been signed."

However, the conflict between the two sides continues. Coal producers are still insisting on raising prices albeit they have lost control over the power plants, while the power companies are demanding price cuts.

Power demand is currently on the rise following the Spring Festival as businesses resume production. Power supply and demand is closely related to the orderly operation of the entire national economy and the issue is taken seriously. Coal companies are therefore expected to maintain stable prices as a means to protect the greater good and ensure security of supply of the nation's energy.

(China.org.cn by Maverick Chen, February 26, 2009)