China’s coal miners have been on a tear. Contract pricing has just been deregulated and shares of its industry leaders are up a fifth on average in just over a month – outperforming even Shanghai’s broad-based market rally. Given the supply-and-demand situation, however, the gains do not add up.
The reforms allow miners and utilities to set so-called key contracts without reference to the regulator. Up to a third of power contracts had been set by this mechanism, which Beijing used to help restrain energy price inflation. Normal contract coal prices are slightly below the spot price, but in Shanxi, the biggest producing region, they are 20 yuan/tonne higher than last year’s key contracts. Achieving that 20-yuan rise would lift, say, earnings per share at China Coal Energy by 8 per cent, according to Citigroup, while China Shenhua could see earnings rise 3 per cent.