Due to the continuation of the current medium and long-term contract benchmark prices, and the fact that the market price of thermal coal is still higher compared to the long-term contract price, the 2025 plan is beneficial to the leading coal companies that have previously performed high-quality contracts.
Wisdom Finance APP learned that Shanxi Securities released a research report stating that the 2025 medium and long-term contract fulfillment plan for thermal coal generally continues the plan implemented in 2024. It maintains stability in reasonable price range determination, pricing mechanism, benchmark prices, and relaxes the requirements for the fulfillment quantities of both coal and power companies. At the same time, it increases the sensitivity to market coal prices and introduces the electricity coal index CECI as the floating price index linked to long-term contracts, enhancing the market-oriented nature of transactions between both parties.
Due to the continuation of the current medium and long-term contract benchmark prices, and the fact that the market price of thermal coal is still higher compared to the long-term contract price, the 2025 plan is advantageous for leading coal companies that have previously performed high-quality contracts: on one hand, these leading companies have advantages in the proportion of long-term contracts and fulfillment rate, where the higher long-term contract benchmark price acts as their moat, benefiting performance stability. On the other hand, the coal companies' signing quantity requirement is reduced by 5%, which helps increase the comprehensive coal sales price of leading companies in the current market price, adding performance elasticity. Meanwhile, capital market reforms continue to emphasize value investment, and it is expected that the attractiveness of high dividend assets will continue in the future.
Key viewpoints of Shanxi Securities are as follows:
Event
On November 19, 2024, the National Development and Reform Commission's Office issued the "Notice on the Signing and Fulfillment of Medium and Long-Term Contracts for Electricity Coal in 2025" (referred to as the "2025 Plan" or "Plan") to comprehensively guide the signing parties, signing requirements, pricing mechanism, capacity allocation, progress schedule, and fulfillment supervision (penalty mechanism) of the 2025 medium and long-term contracts for electricity coal.
Both coal and power sides have slightly relaxed the signing quantity requirements, but the quality requirements for fulfillment have become stricter.
In the 2025 plan, the coal companies are required to reduce the contract volume to 75% of their own resource capacity, down from 80%, a decrease of 5 percentage points. The contract volume for power generation companies should not be less than 80% of the demand, but the article encouraging 100% signing has been removed. The 2025 plan has improved the performance quality for both coal and power contracts. For coal companies, explicit quality terms are required to be included in the contract and compliance supervision, as well as a clear mechanism for settling coal quality deviations. For power generation companies, 80% of the contracted demand should be included in compliance supervision, and the principle of allocating railroad capacity should be under key supervision.
The price mechanism continues the 'benchmark price + floating price' model, but the floating price is now linked to the China Electrical Coal Index (CECI).
In the 2025 plan, regional prices continue the mechanism of reasonable price ranges in various regions; port prices follow the 'benchmark price + floating price' mechanism for signing and execution. However, the floating price is determined comprehensively by the China National Coal Trading Center Composite Price Index (NCEI), the Bohai Sea Power Coal Composite Price Index (BSPI), the Qinhuangdao Power Coal Comprehensive Trading Price Index (CCTD), and the China Electrical Coal Purchase Price Index (CECI), compared to the 2024 plan, adding back the CECI index which was excluded in 2022.
The 2025 plan does not specify a benchmark price, but emphasizes the continuation of the reasonable price range set by the National Development and Reform Commission, with the benchmark price expected to remain unchanged. Additionally, the CECI index is a power coal price index jointly created by the China Electricity Council and major power generation companies, sampling from the prices of northern port warehouse transaction and offshore prices, reflecting the market prices more accurately. It is expected that with its inclusion, the floating price fluctuations will more closely reflect the electricity coal market prices.
The requirement for single railway transportation contracts of over 0.2 million tons has been canceled, encouraging long-term coal contracts to use rail transportation to reduce costs.
In the 2025 plan, railway transport companies are required to prioritize the allocation of railroad capacity to long-term coal contracts with clear quantities, compliant prices, and clear plans. Until completion of the allocation of railway capacity for long-term coal contracts, other coal contracts with unclear capacities will not be processed. The requirement from the 2024 plan for single contracts of over 0.2 million tons has been removed, which will help power companies independently implement 'supply-transport-demand' linkage, achieve 'decentralization to centralization' and 'road transport to rail transport' based on actual conditions, and reduce logistics costs.
Recommended symbols:
It is recommended to pay attention to centrally-owned coal leading companies with a high proportion of long-term contracts, such as China Shenhua Energy (601088.SH), China Coal Energy (601898.SH), and key coal companies in major coal production areas like Shaanxi Coal Industry (601225.SH), Shanxi Lu'an Environmental Energy Development Co., Ltd. (601699.SH), Shanxi Coal International Energy Group (600546.SH), and Jinneng Holding Shanxi Coal Industry (601001.SH); additionally, considering the stronger performance stability of coal-fired power generation integrated enterprises under the medium and long-term contract mechanism, it is advisable to focus on coal-fired power generation integrated enterprises like China Coal Xinji Energy (601918.SH) and Huaihe Energy (600575.SH).
Risk warning:
The long-term benchmark price was lowered, and the fluctuation in prices changed more than expected. Supply exceeded expectations; demand-side improvement fell short of expectations; international coal prices fell; imports of coal increased more than expected; strong price controls; failure of coal enterprises to transition, and so on.
