BEIJING China's top coal miners have mostly resisted pressure from Beijing to sign long-term fixed-price deals this year, in a bet that there's more money to be made in the spot market before government efforts to ease a supply crunch take effect.
Miners including two of the nation's largest, China Coal and Shenhua, have signed deals with utilities, the top consumers of thermal coal, for only about 40 percent of their 2017 output at discounts to the spot market, according to four sources familiar with the contracts.
Getting miners to agree fixed-price deals - a break with their usual practice - was a major part of the government's months-long scramble to avert a winter energy crisis and protect power companies' profits from runaway thermal coal prices.
Electricity companies pushed for more such deals, but the miners, which sometimes assign as much as 60 percent of their output to the utilities but at variable prices, dug in their heels.
"Utilities would love to sign more long-term contracts because the price is cheaper, whereas Shenhua wants to cut the share on contract," said a purchasing manager with one of the top utilities, China Resources Power Holdings Co., who declined to be named due to company policy.
Initially, Shenhua asked some coal-fired power companies to agree to as little as 30 percent of their annual tonnage on fixed-price terms, he said.
The supply crisis and soaring prices were largely a problem of Beijing's own making after it closed mines and limited output earlier in the year as part of its drive to tackle overcapacity and inefficiency in state-owned heavy industry.
The effects were felt across the world, as China is the world's largest consumer and importer of coal, with spot prices in Australia, the Pacific benchmark, doubling in just four months to $120 per tonne by mid-November, their highest in 2-1/2 years.
In China, domestic physical prices shot to 607 yuan ($88.30) per tonne in the first week of November, up from around 400 yuan in April.
The government's reversal of policy to let miners re-open mothballed capacity and the securing of some fixed-price deals have helped bring spot prices down 20 percent since then, but they remain high by historical standards.
When the first fixed-price contracts were sealed in early November, they were at around 585 yuan per tonne, two traders and a miner said, a 100-yuan discount to the futures and physical markets.
ChinaCoal and Shenhua declined to comment.
But miners have kept a lot of tonnage available for sale at spot prices because they hope prices will either rise again or at least stay strong for longer, as it takes time for production to pick up.
China's Coal Association has said the miners are struggling to ramp up output quickly because they have to rehire staff and comply with stiffer safety standards.
"They believe the forward curve coupled with the price negotiated during the last negotiation is undervalued versus their opportunities in the spot market," said Patrick Markey, managing director of commodity advisory Sierra Vista Resources in Singapore.
Nearby domestic futures prices are around 600 yuan/tonne, but they slip to around 488 yuan by July, which suggests the market thinks the miners, who have only just returned to profit after a few lean years, are taking quite a risk.
China Coal Energy Co Ltd returned to profitability in the second quarter with its best quarterly earnings in three years, while China Shenhua Energy Co Ltd reported its best quarterly profit since the final quarter of 2014.
If the miners have misjudged, however, it could be welcome news to the utilities, many of which are unprofitable above 600 yuan/tonne. CR Power Group's breakeven in Jiangsu province is as high as 685 yuan/tonne, but in Inner Mongolia it is as low as 430.
BMI Research analysts believe the fourth quarter of 2016 was the peak, as domestic output increases after falling 10 percent in the first half.
It forecasts prices from Australia's Newcastle port will be around $60-70 per tonne for 2017, down from four-year highs above $100 in November.
Demand growth from utilities is also likely to stagnate this year as Beijing resumes its drive for a more efficient state sector and shifts towards cleaner, renewable power sources, the analysts said.
($1 = 6.8742 Chinese yuan)
(Additional reporting by Muyu Xu; Editing by Will Waterman)