OREANDA-NEWS. February 04, 2015. China's coal firms have agreed to cut contract prices with power plant customers for the first quarter of 2015, but prices are still well above global levels as regulators work to prop up a sector hit by overcapacity and weak demand.

The decision could boost demand for cheaper foreign supplies after shipments jumped by nearly a third in December in response to rising domestic prices, helping to push up Australian export prices despite China trying to restrict low-grade imports. Shenhua Group, China's top coal producer, agreed a price of 520 yuan (\\$83) for a tonne of benchmark 5,500-kcal coal, down 19 yuan or 3.5 percent on the year, setting the benchmark for first-quarter contracts, the official China Securities Journal reported.

This puts the Chinese price over \\$13 a tonne higher than the benchmark Australian seaborne cargo, which currently trades below \\$70 a tonne. The last time Australian exports were priced around the newly set Chinese price was in early 2014.

Including freight costs, coal import prices stand at around 460 yuan, analysts estimated, still 10 percent lower than domestic benchmark Qinhuangdao port spot prices of 510 yuan.

Regulators have repeatedly called on producers to avoid undercutting rivals as industry losses mount, leading to a widening price gap between domestic and overseas markets.

Calls to Shenhua on Tuesday went unanswered, but analysts said the price was within expectations, with coal firms originally proposing a figure of 530-550 yuan and power plants holding out for 490-500 yuan.

"The final price shows that both sides made compromises, but it benefits coal companies more when it comes to the current market price," said Zheng Nan at Shenyin & Wanguo Futures in Shanghai.

China has also tried prop up the ailing sector by imposing output controls and restricting low-grade imports, but Zheng said domestic spot prices were expected to fall further in coming months.

According to the China Coal Industry Association, more than 70 percent of domestic miners suffered losses in the first 11 months of 2014, with profits down 44 percent. The industry has been hit by a demand slowdown as well as a campaign against pollution.

Wang Xianzheng, chairman of the coal association, said last week that "price cuts won't do us any favours" as the coal sector was a big employer and needed protection, adding that "social unrest is the last thing the government wants to see."

China's coal production and consumption is believed to have fallen for the first time in more than a decade in 2014.