Huadian Power International Corporation，China's largest independent power producer，announced Tuesday in a filing to the Shanghai Stock Exchange that it was buying into two Shanxi coal companies through one of its wholly-owned subsidiaries.

The move indicates the company's expansion into upstream business to secure power coal supply and reduce operational risks, said a China Securities Journal report.

Huadian Power International, the listed arm of one of China's five leading power producers, China Huadian Corp, bought a 70 percent stake in each of the two coal companies for 397.6 million yuan ($58.19 million) and 362.6 million yuan respectively.

One of the coal miners will be put into production by the end of this year and the other by the first half of next year, according to the company statement.

With coal reserves of about 290 million tons, the coal companies will provide steady power coal to Huadian Power International's coal-fired power plants, especially for those in Shandong province, the statement noted.

The purchase shows Huadian Power International's determination to achieve coal self-sufficiency and will play a positive role in improving its future performance, the report said, citing an electricity industry researcher.

China, the second largest power consumer in the world, uses coal to generate about 80 percent of its electricity; therefore thermal coal prices are fairly sensitive to the country's power generators.

Chinese coal-fired power plants incurred losses of about 70 billion yuan in 2008 and the country's five leading power-generating companies lost about 30 billion yuan due to soaring power coal costs and the State's price cap on electricity, said Zhai Ruoyu, general manager of China Datang Corp in March this year.

Spot thermal coal prices in China reached a record high of over 1,000 yuan a ton last July. Now, it is hovering around 570 yuan per ton.

On the other hand, the unsuccessful annual coal price negotiation in late December pushed thermal power generators to seek more reliable coal supply sources.

Each year, China's coal producers and power companies sit down to negotiate the following year's contract coal prices, which have long been a bone of contention.

Negotiations for 2009 coal prices resulted in a deadlock, as domestic coal miners aimed to charge power producers 10 percent more for fuel under the 2009 annual contracts, while power producers wanted a price cut of as much as 10 percent.

In order to be less vulnerable to domestic coal prices and less dependent on domestic coal miners, Chinese power enterprises stepped into the coal-mining industry in succession and bought more coal from abroad.

China Datang Corp, also one of the country's five biggest power generators, has been given the green light to expand into the coal- mining business, authorities said in March.

The Customs statistics showed China's coal import reached 9.43 million tons in May, more than double that in the same period of last year. China's coal import and export amounted to 32.20 million and 10.53 million tons respectively in the January–May period, or a net import of some 22 million tons.

China's five biggest power generators include China Huaneng Group, China Datang Corp, China Guodian Corp, China Huadian Corp and China Power Investment Corp.

(Chinadaily.com.cn July 8, 2009)