China Orders Freeze on 2011 Thermal Coal Contract Prices to Curb Inflation

China, the world’s biggest coal producer and consumer, has ordered that 2011 contract prices to supply the fuel to power stations be frozen at this year’s levels to curb inflation.

China also increased the amount of thermal coal it will allow to be sold under 2011 contracts to 769 million metric tons, the National Development and Reform Commission, the top economic planner, said in a statement on its website today. This year’s volume was about 700 million tons, said David Fang, a director at the China Coal Transport and Distribution Association.

Chinese inflation rose to the highest in more than two years in October on climbing food costs. The price move is also aimed at helping the nation’s power producers, half of which are making losses after their coal costs gained more than 20 percent this year, said Fang.

“Coal producers will have to follow the order without too much complaint as everybody knows that the country’s top priority now is to fight inflation,” Fang said by telephone from Beijing. “The contract coal price is effectively the floor for spot prices, so the cap will more or less affect prices” of the fuel for immediate delivery.

Power producers and coal mining companies should sign all contract supply agreements within 25 days, according to the NDRC statement.

The spot price for thermal coal may gain 15 percent to about 850 yuan ($127) a ton on average in 2011 after climbing 22 percent to 740 yuan this year, Helen Lau, a coal analyst with UOB Kay Hian Ltd., said by telephone from Hong Kong. Government efforts to conserve energy and policies to control economic growth will affect demand for coal next year, she said.

The contract volume set by the government will be 23 percent of Chinese coal miners’ estimated 2011 sales of 3.4 billion tons, Lau said. The average power-station coal price under 2010 contracts is 570 yuan a ton, according to Lau.

--Winnie Zhu. Editors: John Viljoen, Ryan Woo.

To contact the reporter on this story: Winnie Zhu in Shanghai at wzhu4@bloomberg.net

To contact the editor responsible for this story: Clyde Russell at crussell7@bloomberg.net.

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