In anticipation of continuous decline in global spot prices, China’s leading policy-makers have prepared reforms to the country pricing system for the carbon fossil fuel market, specifically the coal market.
The Wall Street Journal reported that China is quickly assuming the role of global price setter ever since it surpassed Japan as the world’s largest importer of coal back in 2011.
China’s plan to reform coal prices will greatly affect resource-dependent economies such as Australia and Indonesia. Those two countries have supplied China with more than half of its coal imports in 2012.
China has implemented major policies and practice to increase its renewable energy capacity. However, it still depends on thermal coal for over two-thirds of its power. So the Chinese government delayed reforming its pricing policies and mandated that suppliers keep providing supplies at prices below the market rate.
But things are changing now that the National Development and Reform Commission (NDRC) recently proposed to the State Council that “thorough marketization reforms” be introduced to China’s coal pricing system.
The NDRC is one of China’s highest policy-makers. According to Chinese media reports, the NDRC proposed that the one-year term for key contracts between coal and power suppliers to two to five years, and that the floating range of the linkage between coal and power prices be doubled.
Joseph Fong, an analyst from Hong Kong-based, predicts that China is expecting the price of coal to keep dropping, which prompted the new pricing reforms.
“We believe the timing is quite telling,” Mr. Fong said. “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,” he argued, “if the coal price was to rebound, the NDRC could again be forced to intervene with price caps.”
China has previously performed similar pricing reforms. Back in 2008, it had responded to global oil prices hitting a low of $40 dollar per barrel by liberalizing retail prices for diesel and gasoline.
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