The National Development and Reform Commission adopted measures to promote the stability of coal supply and supply: implementing the "benchmark price + floating price" price mechanism to sign early, sign more, and sign medium-and long-term contracts.

SMM: on December 7, the National Development and Reform Commission issued the notice on the signing and implementation of medium-and long-term contracts for coal in 2021 (hereinafter referred to as "the notice").

The Circular points out that during the 13th five-year Plan period, the medium-and long-term contract system for coal has been continuously improved, and the "benchmark price + floating price" price mechanism has been widely recognized. Medium-and long-term coal contracts have played an important role in promoting the sustained and healthy development of upstream and downstream industries, promoting the balance between supply and demand in the coal market, and ensuring stable and reliable coal supply and energy security throughout the country.

To this end, the "notice" stresses that it is necessary to sign early, sign more, sign solid, and sign long-term and long-term coal contracts. The Circular makes it clear that the number of medium-and long-term contracts signed by coal enterprises above scale should reach more than 80% of their own resources, and the proportion of nuclear increase in coal mines for nuclear production and energy production should reach more than 90% since 2019. The number of medium-and long-term contracts signed by electric power enterprises above scale should reach 75% of the annual coal use, and for power plants that use imported coal, 80% of domestic coal use should be signed medium-and long-term contracts.

Both supply and demand strive to basically complete the signing of the contract by the end of this month.

The Circular clearly states that the signing of the annual contract should be completed as soon as possible. Both the supply and demand sides should strive to basically complete the signing of the contract between the two sides by the end of December 2020. Railway transport enterprises should make a plan for the allocation of transport capacity in advance to ensure that the tripartite contract for production and transportation is completed by the end of January 2021. During the period of contract negotiations, both suppliers and demanders shall ensure that the supply of coal in the coal market is stable and orderly, and shall not affect the normal heating of power generation and the demand for coal for daily use of residents.

Monthly output of raw coal in China (unit: 10,000 tons)

The reporter noted that since the beginning of this year, the National Development and Reform Commission has stressed the importance of doing a good job in medium-and long-term coal contracts by issuing documents, meetings, and other ways.

In early July this year, the website of the National Development and Reform Commission published the notice on doing a good job in the supervision of the performance of medium-and long-term contracts for coal in 2020, in which it is clear that the medium-and long-term contracts of 200000 tons and more of thermal coal and the medium-and long-term contracts of 100000 tons and more of coal used in metallurgical, building materials, chemical and other industries, which are independently negotiated and verified by the three parties, will be listed as key supervision contracts in 2020, and their implementation requirements will be made.

On July 9, the National Development and Reform Commission organized a national teleconference and arranged for energy to welcome the peak and spend the summer in 2020. In terms of coal supply protection, the meeting put forward four key tasks, the first of which emphasized that "deepen the reform of the medium-and long-term coal contract system, further increase the proportion of contracts signed, and make full use of credit means to strengthen supervision over performance."

On August 27 this year, Liu Ming, deputy director of the Economic Operation Regulation Bureau of the National Development and Reform Commission, said at the 2020 Summer Coal Trade Fair that the signing and implementation of the contract of the Coal Association was listed as the focus of the industry in the second half of the year.

Why does the National Development and Reform Commission attach so much importance to coal medium-and long-term contract work? The reporter noted that "stabilizing coal prices" is regarded by the industry as an important factor in promoting this work.

Zhang Hong, spokesman for the China Coal Industry Association, has said that at present, medium-and long-term contracts account for more than 70% of the national coal market, avoiding the ups and downs of the coal market to some extent. Since the implementation of the medium-and long-term contract system in 2017, coal prices have remained stable, with price fluctuations of no more than 50 yuan per ton of coal.

Implement the "benchmark price + floating price" price mechanism

Compared with the proportion of medium-and long-term contracts signed by enterprises in previous years, the "notice" issued this time has further requirements.

The circular points out that it is necessary to further increase the proportion of medium-and long-term contracts. The number of medium-and long-term contracts signed by coal enterprises above scale should reach more than 80% of their own resources, and the proportion of nuclear increase in coal mines for nuclear production should reach more than 90% since 2019.

In accordance with the requirements of the Circular of the General Office of the National Development and Reform Commission on promoting the signing and performance of medium-and long-term contracts for coal in 2020, issued in November 2019, "the number of medium-and long-term contracts signed by the central government, provinces, autonomous regions, municipalities and other large-scale coal and power generation enterprise groups should reach more than 75% of their own resources or procurement."

Zhang Hong believes that the pace of China's economic recovery will further accelerate next year, which will inevitably lead to a new round of demand for coal consumption, which is expected to be stronger than this year, so the overall supply and demand of coal next year should be in a tight balance. We need to do a good job in ensuring coal supply ahead of time.

In terms of price, the notice emphasizes the implementation of the "benchmark price + floating price" price mechanism. If the supply and demand sides can reach an agreement on the medium-and long-term contract price, it shall be carried out in accordance with the agreement of both parties. If no agreement can be reached, it shall be determined in accordance with the principle of "benchmark price + floating price".

In terms of the benchmark price, the benchmark price of the launching coal contract is first determined by both parties through consultation, and if the consultation is inconsistent, the benchmark price of the railway direct coal contract shall be determined by the average price at the mouth of the pit after deducting the transportation and miscellaneous charges and the monthly average transaction price of both supply and demand in 2020, which shall be determined comprehensively according to the weight of 50% each.

In terms of floating price, the floating prices of launching coal contracts and railway direct coal contracts can be comprehensively determined by combining the Bohai Rim Coal Price Index, CCTD Qinhuangdao Port Coal Price Index and China Coastal Thermal Coal Purchasing Price Index.

"the work notice signed by the long-term Association first affirms that the medium-and long-term coal contract has made important contributions and significance in stabilizing the safety of domestic coal supply and stabilizing the fluctuation of coal prices in the market." Mao Jun, manager of the commodity strategy department of Jiangsu Jinying Capital Management Co., Ltd., told Futures Daily that the "benchmark price + floating price" model of the long-term Association contract has always been regarded as reflecting the government's close regulation and control of bulk energy commodities. it also respects the scientific pricing mechanism for the operation of market prices, while ensuring a stable and reliable supply of coal. It has also played a very positive role in promoting the healthy development of the industry and promoting the process of marketization.

Zeng Xiang, a senior analyst at Yide Futures Power Coal, believes that the proportion of medium-and long-term contracts in this year's "notice" is higher and more detailed than that of last year. Among them, the number of medium-and long-term contracts signed by coal enterprises above scale has increased from more than 75% of their own resources to more than 80%. Increase the requirements of the long-term Association for the nuclear increase in coal mines since 2019, requiring that the proportion of this part be signed up to more than 90%. Power companies have also further subdivided the proportion of domestic coal used in power plants that use imported coal, requiring that more than 80% of their domestic coal use sign medium-and long-term contracts. At the same time, increase the requirements for medium-and long-term contracts with a clear price mechanism for 3-5 years, and the proportion shall not be less than 30% of the total annual medium-and long-term contracts.

A reporter from the Futures Daily found that in terms of ensuring performance, the "notice" stressed that it is strictly forbidden to sign false contracts for the purpose of seizing railway capacity. At the same time, in the breakdown of the performance assessment, it is further refined from the quarterly and annual assessment to the monthly, quarterly and annual assessment, in which the monthly performance rate shall not be less than 80%, and the quarterly performance rate shall be raised from no less than 80% to no less than 90%.

According to Mao Jun, the government has never stopped improving and revising the medium-and long-term coal contract system, which is mainly manifested in: first, in the process of maturing medium-and long-term coal contracts, it continues to expand the coverage of long-term contracts, providing the best possible supply guarantee for high-quality enterprises with ability, credit, and demand, and establishing integrity and care in the whole society. Second, the proportion of medium-and long-term contracts signed by coal companies is constantly expanding. We note that this time, the number of medium-and long-term contracts signed by coal enterprises above scale should reach more than 80% of their own resources, which is significantly higher than the previous 75%.

"compared with 2020, 2021 will not only increase the number of long-term agreements and performance rates, but also have detailed requirements for the types of enterprises, the nature of contracts and the frequency of performance assessment to a certain extent. it can be seen that the state affirms the role of medium-and long-term contracts in stabilizing and ensuring coal supply and demand, and optimizes and improves medium-and long-term contracts after summing up experience." Zeng Xiang said.

Cheng Xiaoyong of Baocheng Futures Research Institute believes that at present, the core problem of the coal market is supply. As the Spring Festival in 2021 is in mid-February, which is closer to 2018, judging from the trend of daily consumption of power plants at that time, the downward inflection point of daily consumption appears in early February, while the daily consumption level in January basically maintains stable operation. By contrast, the daily consumption of power plants in 2019 and January 2017 has reached a downward inflection point. The pace of decline in daily consumption of power plants will be relatively slower in January next year, which puts forward higher requirements for supply. in fact, there is still a structural shortage in inventory in the middle and lower reaches, which further contributes to the rise in coal prices. If we want to see a substantial decline in coal prices, we need to further increase production in the main producing areas or relax Australian coal imports, otherwise, coal prices will continue to be strong.