March 17, 2015 / 6:13 AM / 5 years ago

China coal giant calls for "minimum price" to ease sector losses

* Says coal prices now have dropped below the cost of production

* Calls for minimum price of 0.1-0.12 yuan/kcal -Datong chairman

* More than 70 percent China’s coal mines suffered losses in 2014

By David Stanway

BEIJING, March 17 (Reuters) - A leading Chinese coal producer has called on the government to set a minimum price for the fuel to ease losses and prevent power firms from taking advantage of a chronic supply glut.

The proposal reflects the government’s dilemma as it tries to curb consumption of polluting coal while bailing out a sector that employs 5.8 million people.

Mines are facing “huge difficulties” due to falling prices, with more than 70 percent suffering losses last year, Zhang Youxi, chairman of China’s third biggest coal producer, Datong Coal Mine Group, said in a proposal to parliament.

He said China should set a minimum price of 0.1-0.12 yuan per kilocalorie, which would put the price of benchmark 5,500 kcal coal at 550-660 yuan ($88-106) per tonne.

That would be higher than Qinhuangdao port SH-QHA-TRMCOAL prices of 485 yuan and benchmark Newcastle prices of around $67.50 a tonne.

“When prices temporarily surged in 2008 and 2011, the state stepped in with temporary price-restraining measures,” Zhang said. “Right now, prices have fallen below the cost of production at many enterprises, and they are still falling.”

China’s power sector is making a bad situation worse by negotiating further coal price cuts ahead of an expected drop in retail power tariffs, he added. Profits at top five state utilities rose 35 percent in 2014, Zhang said.

TURNING THE INDUSTRY AROUND

Smog-hit China is desperate to curb its dependence on coal, which accounts for about two thirds of its primary energy use, and an economic slowdown together with a “war on pollution” have already hit demand.

Total output fell 2.5 percent last year while consumption dipped 2.9 percent, the first falls in over a decade.

China’s National Development and Reform Commission has vowed to impose more consumption restrictions, but also promised to “continue working to turn the coal industry around”.

Output cuts remain the main strategy.

The northern regions of Inner Mongolia and Shanxi - which account for most of China’s total output - have vowed to cap annual production at 1 billion tonnes and ban new project approvals. China’s big miners are also cutting output this year.

Top producer China Shenhua Energy plans to cut production by 10.8 percent to 273.6 million tonnes in 2015, while China Coal Energy Ltd has already seen output fall 31.6 percent in the first two months of the year.

$1 = 6.2546 Chinese yuan Editing by Himani Sarkar

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