China’s coal price caps could worsen shortages – Morgan Stanley

China’s attempts to cap coal prices in order to encourage power generators to maintain full output could be counterproductive, with private miners likely to cease operations until the caps expire, said Morgan Stanley.

In a note to investors, it said that ‘given the inelastic coal demand, we believe the incentives for coal mines, especially privately owned mines, to ask for higher prices remains high.’
On June 20, state regulators ordered coal producers to maintain prices at June 19 levels until the end of the year.

However, the instructions were largely ignored, with benchmark 5,000 kcal coal prices rising by an additional 20 pct to more than 1,000 yuan/ton in recent weeks.

The government said yesterday that it would tighten monitoring at spot markets and seaports in order to make sure the caps are effective. It said it would also crack down on those coal producers who fail to honor supply contracts to coal companies.

However, the government will still struggle to implement the policy in a fragmented market with ‘no transparent transaction record for private mines,’ said Morgan Stanley .

Furthermore, ‘private mines may slow down or stop coal production until price cap is removed by end 2008, with expectation to sell at higher prices later, which may intensify current tight supply.’

Forbes