Local governments in Beijing and Tianjin are considering plans to set up coal trading centers in the cities, in order to meet demand from power plants.

The move, which would contribute to the cities' tax revenues, would also be the first step in ending the national annual coal ordering system.

Although the government is considering scrapping the 4-decade-old annual coal ordering meeting system by setting up a coal trading center, the National Development and Reform Commission (NDRC) has yet to draft a detailed plan, sources said.

At present, the government invites most of big coal companies and coal consumers - including power, steel and petrochemical companies- to the coal ordering meeting at the beginning of the year to agree coal supply contracts for the year ahead.

Half of the nation's total coal consumption and more than 70 percent of the thermal coal consumption is agreed at the meeting.

But the meeting has descended into chaos since the government liberalized thermal coal prices in 2002.

Coal companies and power firms, which form separate alliances to negotiate the contract terms at the meeting, tend to end up in a stalemate over the coal prices. The coal firms demand a price increase, while the power firms refuse to accept this, claiming that they cannot afford the rise since the government froze electricity prices.

The NDRC has tried to narrow the gap between the two sides, but these efforts seem to be futile.

The deadlock has caused many generating companies to run out of coal and cease operations, resulting in rolling blackouts in some areas last year.

Earlier last month, Zhang Guobao, vice-minister of the NDRC, said he hoped to end the planned-economy-style ordering meeting this year, and set up a coal trading center instead.

The trading center will allow buyers and sellers to negotiate the contracts online at any time. It will help reduce price fluctuations in the market and reduce conflicts between the coal and power sectors.

The trading center could be a joint venture between large coal and power companies, and transportation companies, Zhang suggested.

Even though it could be the answer, experts said it will take two or three years to build the trading center, as the government has to work to improve the transportation and online trading for coal.

"The ordering meeting may still exist for the time being before a better is way found," said a manager with the China Energy Power Industry Fuel Company. The company used to be responsible for the coal supply for the State Power Corp, the power sector's former monopoly.

The NDRC has appointed the company to investigate how the reform the current coal ordering system, the manager said.

Experts said one of the good reasons for the meeting to exist is with regard to transportation.

Most of the coal in China is carried by rail on its way to power stations. But coal supply has frequently been restricted by the insufficient capacity of the railways.

At the coal ordering meeting, the railway departments should promise that they will deliver all supplies on coal in full.

"If this is not resolved, then who should be responsible for arranging the coal transportation," said an official with a major coal company. He added that with an online trading system, it is quite difficult for the buyers to check the quality of the coal.

The supply of nearly 80 million tons of coal was guaranteed at the coal ordering meeting earlier last month. Both of the coal and power companies were satisfied as the government raised the on-grid electricity rate by 0.07 yuan (0.008 US cent) per kilowatt-hour to offset a coal price hike of 12 yuan (US$1.5) a ton.

(China Daily February 6, 2004)