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Author/Source: Securities Daily Date: 2009-4-7 -------------------------------------------------------------------------------- Shenhua Group and China Resources Group recently signed a comprehensive strategic framework agreement in **, which is seen by outsiders as a breakthrough in the dilemma surrounding thermal coal; the coal-power negotiations that had been stuck for over three months now show signs of improvement. Some industry analysts believe that China Resources’ decision to sign a contract with Shenhua in advance has weakened the price alliance established within the power industry, indicating a trend toward reconciliation between coal companies and power companies. It is understood that, according to the coal supply agreement signed between Shenhua Group and China Resources, Shenhua will supply 85 million tons of thermal coal to China Resources over the next 5 years. The principles for determining the coal price have also been established, with a price of 540 yuan per ton, along with a specified range for fluctuations above and below this amount. Liu Caiying, vice president of the China Coal Industry Association, said that this price is about 10% higher than last year’s contract price, but it remains 20-30 yuan per ton lower than the market price. However, a senior power industry analyst interviewed by the reporter disagreed with this view: “The price under this agreement has not yet been determined; the 540 yuan per ton mentioned above is only a temporary settlement price within the industry, and it certainly isn’t the official contract price. It’s possible that adjustments will be made to the price in the future, with refunds or additional payments as necessary.” ” He also said that the 85 million tons of supply mentioned in this agreement should not be the focus of attention; the real key issue is price. Only after the price is determined can we make some judgments regarding future changes in the coal power pricing system. The final price has not yet been determined, so it is impossible to assess the collective actions of coal-fired power companies. At present, power reform remains challenging, and the mismatch between upstream and downstream sectors of coal-based power generation still requires administrative intervention. Currently, both coal-fired power producers and electricity consumers are waiting for the right moment; it is necessary for **someone to step in and facilitate discussions between the companies in order to determine a suitable balanced price. Li Chaolin, an expert in coal market analysis, believes that China Resources’ decision to sign coal contracts with Shenhua in advance has weakened the alliances formed within the power industry, while also opening a path to breaking the deadlock in the coal and power sector. China Resources’ price increases will also affect the five major power companies; their previous requests for price cuts are certainly not going to be fulfilled. However, although China Resources has broken away from the price alliance by being the first to sign a contract for a 10% increase in the price of thermal coal, other power companies seem to have not followed suit yet, showing no signs of relenting. Huang Shenyang, deputy general manager of Huadian Coal Industry Group, told reporters that this does help to ease the current deadlock to some extent, but the prices agreed upon by the five major power companies are ultimately determined by the market; therefore, China Resources’ price level cannot represent that of the five major power companies. China Resources Power is the largest independent power generation listed company in China, aside from the five major power groups. At the coal ordering conference at the end of 2008, China Resources Power joined forces with the five major power groups to jointly resist coal companies’ requests for price increases and refused to sign contracts for key thermal coal. Currently, the electricity market features a \"5+1\" structure in which five major power groups have formed alliances with China Resources; the demand for thermal coal by companies such as China Resources Power and these five major power generation groups accounts for half of the total domestic demand for thermal coal. Due to price differences, the power alliance and coal companies have yet to reach an agreement. Regarding coal, due to the excessive adjustments in taxes and fees, which have resulted in significant additional costs for enterprises, there is a call for a moderate increase in the price of coal this year. In terms of electricity, the five major power companies suffered heavy losses in 2008. It is estimated that the national economy will decline more rapidly this year, meaning there is significant room for a reduction in coal prices, with calls for substantial cuts on top of the current pricing. While one side is trying desperately to cut costs and reduce losses, the other side aims to achieve growth by raising prices. For some time now, power companies and coal companies have been unable to reach an agreement on the contract prices for coal used in electricity production. One of the consequences of coal companies’ reluctance to reduce the contract prices for thermal coal is that China Resources Power and the five major power groups are forced to increase their reliance on importing coal from abroad.