Shenhua plans to scrap fixed coal prices

China Shenhua Energy Co Ltd, China's top coal producer and exporter, said on Thursday it planned to scrap fixed coal prices from next year and to continue expanding production until at least 2010.

"We will only fix the quantity but not the price level, so we can raise the long-term contract price up to the market price," Chairman Chen Biting told a briefing in Hong Kong.

"We intend to have friendly and open negotiations with our long-term customers to get their understanding and support."

Chen said the company had term contracts for about 70 million tonnes and most of the contracts would expire by the end of this year.

"There's quite a big jump between this long-term price and the current market price. This has negatively impacted the profit of the company in the past," he added.

Beijing has moved to close many independent mines this year after a string of coal mine accidents and in an effort to crack down on heavily polluting sectors as China prepares a makeover ahead of next year's Beijing Olympic games.

"With the change in the coal suppliers and the shutdown of a lot of smaller mines, the main deciders of the price are the main players," Chen said.

But Shenhua's new price regime would be too small to have any impact on the overall picture, Chen said. The proliferation of small players means the firm's overall output accounts for less than 10 percent of Chinese output, analysts say.
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Shenhua plans to keep expanding its coal production at the same rate it has achieved since it first floated its shares in June 2005, Chen said, adding at least 15 million tonnes of production in each year to 2010, with a "big leap" next year.

"By a big leap next year, I'm referring to growth of not less than 20 million tonnes," he said.

Analysts praised the company's cost control in the first half of the year, and the firm said it planned to do even better in the second half.

"In H1 production costs were 9.2 percent higher. In H2 we expect the increase will be lower than 5 percent," said Chief Financial Officer Zhang Kehui.

Shenhua plans to tap the equity markets again this year by listing 1.8 billion shares in Shanghai, which financial sources have said could raise up to $6.3 billion.

It will use the proceeds to fund investment in new mine construction and upgrading of old ones, as well as making its transport network less congested by increasing railway capacity and dredging ports.

Shenhua also plans to add more domestic resources by injecting some assets from its parent company and is also looking at buying assets overseas.

"We will conduct overseas acquisitions in a prudent and selective manner," Chen said. "We've conducted a market survey overseas and we've conducted due diligence. We've been looking at some overseas assets that enjoy synergy with our current business."

If the company's shareholders approve the share-listing plan at an extraordinary meeting on Friday, shareholders will receive a special dividend totalling 22.544 billion yuan ($2.97 billion) in two tranches.

The second tranche, of 5.745 billion, will only be paid after the firm's auditors have approved its 2007 results.

Shenhua's shares were up 5.2 percent at HK$31.25 by 0409 GMT, outperforming Hong Kong's China Enterprises Index <.HSCE> which was up 3.3 percent at the same point. ($1=7.583 Yuan)