Previously, compulsory thermal coal supply contracts set the prices that power providers paid to steam coal producers. The system was created in an effort to balance power supply and availability across the country's regions and cities.Current thermal prices paid by Chinese utilities are low, with Australia's benchmark spot thermal prices hovering around the $85 mark, 30 percent lower than 2011. Contracts for coal with a heating value of 5,500 kilocalories a kilogram for shipment to South China from Indonesia in the second quarter remained at $86.10 per ton, while the February contract was unchanged at $85.10 a ton. The low prices are a key consideration in the timing of the policy change, as the government is exposing energy markets to international prices at a time when there is little risk of seeing a dramatic change to energy prices. "The move to cancel limits on thermal coal prices will not lead to sharp price hikes as demand is sluggish amid the global economic slowdown," Zhang Yongjun, an analyst with the China Center for International Economic Exchanges, said to People's Daily Online. China's world-leading thermal imports have grown rapidly in recent months, with Platts reporting that the country imported 14.45 Mt in November, a 30-percent increase from the previous month and a monthly record. The removal of price ceilings is also likely to result in further increases to the country's thermal imports as domestic prices will eventually rise, making lower-cost international providers more competitive, Reuters reported. China's demand for thermal coal appears to be unstoppable. Power consumption in the country grew 7.6 percent year on year to 413.9 billion kilowatt-hours (kwh) in November, more than October's 6.1 percent growth, according to China's National Energy Administration. Thermal imports continue to flow primarily from Indonesia and Australia, from which China imported almost 9 Mt of steam coal, while US imports fell by 63 percent in November to just 155,000, Platts reported.
Thermal coal demand is, however, expected to rise in the US, despite the fact that its share within the US energy mix has fallen for the last three years. A report released in October by the US Energy Information Administration pegs the reverse in coal use on a forecast rise in natural gas prices after record-low prices have kept new gas projects from breaking ground.But that very same gas-coal relationship is expected to drive US domestic coal consumption down sharply in the coming years, from 697 Mt annually in 2011 to 600 Mt in 2017, the International Energy Agency predicted in its (IEA) medium-term coal market report last month. The same IEA report also notes that China's growing coal imports are expected to top 300 Mt in the next five years.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article. Related reading: Chinese Growth Welcome News for Coal Producers Chinese Market Reforms Impact Coal Markets from Coal Investing News