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.
The bottom line, however, also depends on the direction of the long-term coal price. This does not look so good. Spot prices at Qinhuangdao, the world's biggest coal port, are about 635 yuan/tonne, a third below their peak a year ago and in spite of winter demand, little changed from their summer doldrums when production cuts finally put a floor under the price.
Yet now China's miners are keen to increase output. Overall production from the biggest coal regions is set to rise about a fifth, or 450 million tonnes, by 2015, Jefferies estimates, while China's likely demand will rise less than 100 million tonnes. And transportation bottlenecks from Shanxi that had for years helped boost prices are also easing. The result seems certain to be weaker domestic and seaborne prices without a strong economic pickup.
Across Asia, investors get this: Gains in the past month for Bloomberg's regional coal index – two-thirds Chinese with a handful of Australians and Indonesians – are half the average gain from the leading Chinese groups in it. Unless the locals know something their regional rivals do not, this rally has gone too far.