Chinese reforms anticipate sustained decline in coal prices

Slated reforms to China’s pricing system for the carbon fossil fuel indicate that the country’s leading decision-makers anticipate a sustained decline in global spot prices.

David Winning writing for the Wall Street Journal says China surpassed Japan as the world’s largest coal importer last year in a sign that the Asian giant is fast assuming the role of global price setter.

This development means slated price reforms for the sedimentary energy source in China will have major implications for resource-dependent economies such as Australia and Indonesia, who have jointly supplied China with over 50% of its coal imports so far this year.

Thermal coal continues to supply over two-thirds of China’s energy requirements despite major pushes in both policy and practice for the increased role of renewable energy.

This reliance on coal has led the Chinese government to drag its feet on the reform of pricing policies, continuing to mandate that suppliers provide at prices below the market rate.

The Chinese media reports, however, that the National Development and Reform Commission (NDRC), one of the country’s most authoritative decision-making bodies, has just recently submitted a proposal to the State Council for the introduction of “thorough marketization reforms” to the country’s coal pricing system.

The proposed reforms include the extension of the term for key contracts between coal and power suppliers from one year to two to five years, and an increase in the floating range of the linkage between coal and power prices from 5% to 10%.

Hong Kong-based analyst Joseph Fong believe the emergence of the new reforms at this particular time indicates China expects a sustained decline in the price of coal:

We believe the timing is quite telling…the NDRC is choosing to reform the coal price now as it expects the coal price to continue to decline, allowing it to be successful. Otherwise, if the coal price was to rebound, the NDRC could again be forced to intervene with price caps.

Recent precedent would also support this viewpoint, with China liberalizing retail prices for gasoline and diesel in late 2008 just as global oil prices were approaching a low of $40 dollar per barrel.

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