China Coal Behemoth Said to Sideline Traders to Cool Prices

Updated on
  • Shenhua stops selling to customers without long-term contracts
  • Traders must pay spot prices even for contraced supplies

China Urges Coal Miners to Cut Output, Ease Supply

Shenhua Group Corp., China’s biggest coal producer, is seeking to limit sales of the fuel to end-users and choke off supplies to traders amid government pressure on the nation’s major miners to cool surging prices.

The Beijing-based company has changed its thermal coal sales policy to limit how much trading companies can buy and allow some sales to be based off spot prices rather than contracted prices, according to people with knowledge of the situation. Shenhua stopped selling the fuel to buyers who don’t have annual long-term contracts from Nov. 15, said the people, who asked not to be identified as the information isn’t public.

Coal has skyrocketed this year as China’s government forced miners to curtail output, an effort intended to support slumping prices that regulators are now scrambling to reverse. The surge has barely eased despite government efforts since September to boost supply and is drawing increasing scrutiny from authorities, who have encouraged coal miners to sign long-term contracts with end-users to help stabilize prices and cracked down on futures trading to curtail speculation.

Shenhua’s new policy “sounds like measures aimed at cutting off hoarding supply and speculation from coal traders as Shenhua, as well as the Chinese government behind them, wants the fuel to be sold directly to users who actually burn it,” said Leo Wu, an analyst at Guotai Junan Securities Co., said by phone. “Cutting out middlemen may straighten out the supply-demand situation much more quickly.”

‘Super Profits’

A Beijing-based spokesman for Shenhua said the company was unable to immediately comment. China Shenhua Energy Co., the state-run miner’s main listed unit, added 0.9 percent to HK$16.26 as of 9:58 a.m. in Hong Kong, and is up 33 percent this year.

“Many coal traders have used the price differentials between contract and spot prices to make super profits in the past few months,” said Helen Lau, a Hong Kong-based analyst at Argonaut Securities (Asia) Ltd. “Shenhua’s move was in line with the country’s policies to curb speculation and hoarding.”

Shenhua’s move showed the company’s strong bargaining power in China’s tight coal market, and is “a reflection of the reality that Shenhua doesn’t have sufficient coal to provide to everyone and has to find ways to prioritize,” Lau said.

Shenhua and China National Coal Group Corp., the country’s two biggest coal producers, signed long-term supply contracts with five of the largest coal-fired power generators last week in a price range anchored at 535 yuan a ton.

Power-station coal at the port of Qinhuangdao dropped to 680 yuan to 685 yuan per ton on Nov. 13, the first decline in a year, according to data from the China Coal Transportation and Distribution Association. Shenhua’s November contracted coal price was 585 yuan a ton, almost 7 percent higher than the previous month, according to a report from coal news website, citing sources it didn’t identify.

The “reasonable range” for coal prices is 550 yuan to 660 yuan a ton, China Shenhua Energy told an event this month hosted by Citigroup Inc. in Shenzhen.

Shenhua’s new thermal coal sales policies as of Nov. 15:

  • Shenhua will stop selling to buyers who don’t have annual long-term contracts.
  • Shenhua will maintain its policy for end-users who haven’t already bought all volumes stipulated under their current annual contracts, which requires them to pay for 40 percent of the monthly volumes at the contracted price and 60 percent at current spot prices.
  • Clients who are end-users who already purchased the annual volumes stipulated in their contracts can only buy additional volumes based off current spot prices.
  • Clients who are traders will need to pay spot prices for coal supplied through their current long-term contracts, rather than the contracted price.
  • Clients who are traders will only be able to receive November coal volumes that don’t exceed the monthly average they purchased during January to July.

— With assistance by Gary Gao, Alfred Cang, and Aibing Guo

(Updates with analyst comment in fourth paragraph.)
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