China Coal and Electricity.pdfVIP

01 December 2011 Fixed Income Research /researchandanalytics Chinese Coal and Electricity Policy Changes Commodities Research Research Analysts NDRC Takes Aim at Electricity Shortages and Ric Deverell Energy-Intensive Industries +44 20 7883 2523 ric.deverell@ The Chinese government yesterday announced several measures related to the coal and electricity markets, focused on reducing anticipated winter electricity Marcus Garvey shortages and promoting energy efficiency full list in Exhibit 3 : +44 20 7883 4787 marcus.garvey@ ? RMB 0.026/kWh increase in price received by thermal electricity generators, Andrew Shaw and increased premiums for renewable energy and de-nitrification +65 6212 4244 ? RMB 0.03/kWh average price increase for consumers equivalent to average andrew.shaw@ on-grid tariff hikes when premiums are included Ivan Szpakowski ? 5% limit to increases in annual coal contract prices +65 6212 3534 ivan.szpakowski@ ? RMB 800/t cap on domestic coal spot prices The hike in on-grid tariff rates for thermal generators was already factored into our assumptions and, while supportive of Chinese thermal coal demand, reaffirms rather than alters our view. We do not believe the limit on contract coal prices is material given the size of China’s spot market. Contracted volumes represent around 800Mt of domestic coal and so, while indirectly important for broader prices, are far from the market’s price setter – particularly as these tonnes do not compete with imported coal. While the limit on spot prices is superficially bearish for coal prices given the relevant benchmark is currently at RMB 845/t, the limit will be difficult to enforce, and companies are adept at maneuvering around such obstacles. In 2008, the NDRC tried to enforce contracts at prices significantly below spot price levels and to limit spot price movements. However, coal companies supplied low-c