Huaneng signs coal purchase contract
By Mai Tian (China Daily)
Updated: 2004-07-27 09:20

Huanneng Power International, China's largest independent power producer, yesterday agreed to buy more than 30 million tons of coal from Shenhua Group - the nation's largest coal producer - over the next three years.

The multi-billion yuan deal is among the first long-term coal purchase contracts in China.

It will help power generators secure ample coal supplies for electricity generation at a time when many power plants are hungry for coal.

Hua Zeqiao (left), general manager of Shenhua Coal Trading Co, shakes hands with Huang Yongda, general manager of Huaneng Power International, at the signing ceremony of coal purchase contracts between the two companies.[newsphoto]

According to yesterday's agreement, Huangneng will buy 9 million tons of high-quality coal from Shenhua in 2005, 10.5 million tons in 2006 and 11 million tons in 2007.

The companies have agreed on a basic coal price and allowed the price to float up or below by no more than 5 per cent within one year.

The annual coal purchase from Shenhua will account for about 15 per cent of Huaneng's annual consumption, and about 10 per cent of Shenhua's total sales.

Huaneng also agreed yesterday to buy additional 1.5 million tons of coal from Shenhua for the consumption of this year. Shenhua now provides several million tons of coal to Huaneng's power plants in North China and in coastal areas.

"It is a win-win deal for both companies," said Shenhua President Chen Biting. "We have secured a big customer and Huaneng has found stable resources."

"We believe the contract could be extended after three years," Chen added.

Huaneng International President Li Xiaopeng said the contract is the continuation of the strategic partnership between the two companies established last August.

"We believe it is only the start, and we will explore more potential co-operations," said Li.

The government is encouraging coal and power companies to sign long-term coal purchase contracts.

Chinese power plants normally sign one-year coal purchase contracts with coal mines at the end of the previous year to cover about one-quarter of their coal consumption in the year ahead.

When coal prices fluctuate, coal and power companies are reluctant to observe the contracts as they tend to disagree on the prices.

The conflicts have intensified this year as coal prices on the spot market have risen up by 25-30 per cent, while the contracted price rose by less than 10 per cent.

Many coal mines failed to observe the contracts and tried to sell the coal on the spot market to cash in on the price hike. As a result, some power plants have ran out of coal stockpiles and had to stop operations, worsening the national power shortage.

Huaneng's officials said the long-term contracts also allows the company to get a good bargain on the price because it is the first time for the company to organize its subsidiary plants to sign the uniformed coal purchase contracts.

In the past, Huanneng's power plants tended to buy coal separately, which made them lose bargaining power when negotiating with coal suppliers.

Huaneng announced earlier this month that its total power generation increased by 18.8 per cent year-on-year in the first half of this year.

The company plans to expand its production capacity by at least two-thirds by the end of 2008 as it races to quench the booming country's thirst for energy.

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