China gives new incentives to boost high-quality coal capacity

China plans to increase high-quality coal supply by allowing mines to boost capacity if they shut outdated production processes, the latest effort by authorities to further streamline the industry and stabilize coal prices. Coal companies will be encouraged to close inefficient and polluting mines and replace them with larger ones if they meet certain standards, the National Development and Reform Commission (NDRC) said in a statement on Friday. Companies that agree to sign long-term contracts with power plants or to set up joint ventures with power companies will be allowed to expand their capacity by 130 percent to 300 percent.

The NDRC would give those allowed to boost capacity less than a year to shut outdated production, the statement said. The incentives are the latest of several measures taken by China to foster closer ties among coal mines, coal-related businesses and power utilities as it looks to stabilize coal prices. Last year, China’s top coal miner Shenhua Group Corp took over China Guodian Group Corp and created world’s largest power utility. In late January, four of the country’s major utilities warned of tight coal supplies after thermal coal prices on the Zhengzhou Commodity Exchange hit a record of 679.8 yuan ($107.53) a tonne. Spot coal prices at ports have been above 750 yuan a tonne in recent weeks.

To halt the price surge and ensure coal supplies to utilities amid frigid weather, the NDRC earlier this week ordered the major coal port of Qinhuangdao, in China’s northeastern Liaoning province, to cap FOB thermal coal prices at 750 yuan a tonne from Feb. 5. The power industry had borne the brunt of the price spike, coming under severe pressure from late November when coal climbed above 640 yuan a tonne, the approximate level at which utilities can break even. With electricity prices fixed in China, utilities are unable to pass on their high feedstock costs to customers. Among other incentives, companies with mines in nature reserves or regions with a high risk of natural disasters will be allowed to double capacity if they re-locate, the NDRC statement said. China aims to eliminate all coal mines with a capacity of less than 90,000 tonnes this year. Industry experts say more than 1,000 mines with a combined capacity of around 150 million tonnes of coal capacity are expected to shut in 2018.