Singapore — China has announced that it will remove the coal-electricity price linkage mechanism starting January 1, a move that would be likely to further dampen domestic thermal coal prices, market sources said Friday.
According to a State Council statement released Thursday, China will replace the current price mechanism of linking coal and electricity with a new floating mechanism.
Under the current arrangement, coal-fired power prices are linked to fixed coal prices, while the new mechanism will be based on market prices through negotiations or biddings. It will also be based on a floating price with upward revision to be capped at 10% and downward revision of not more than 15%, according to the statement.
Earlier in March, the Chinese government has announced to lower industrial electricity prices by 10%.
Market sources said that the new mechanism will help to reduce business costs by keeping electricity prices low, but it in turn will further suppress domestic coal prices.
"Industrial activities in China have already slowed down during the trade war, so coal demand has weakened, and this new mechanism is not a good news to support coal prices," said an east China-based trader.
"This new move is actually a way of lowering on-grid prices, and pushing the domestic coal market to be more buyers-oriented, so it's definitely going to have an impact on the coal prices," said Zhang Feilong, coal analyst with YiMei Net.
Chinese top economic planner National Development and Reform Commission has aimed to keep domestic coal prices at the "reasonable range" of Yuan 500-Yuan 570/mt.
Chinese domestic 5,500 kcal/kg NAR prices were at the range of Yuan 580-Yuan 630/mt this year.
The fatal mine accident in Shaanxi earlier this year had prompted massive safety checks which caused supply disruption and pushed up prices to above Yuan 600/mt FOB.
The price of this grade was assessed Thursday to be Yuan 585/mt FOB Qinhuangdao, according to S&P Global Platts data.