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This might hit our favorite coal companies...

TOKYO (MarketWatch) -- A move by China, the world's top coal-consuming nation, to effectively cap the price of coal, will hurt domestic producers but benefit many independent power producers, analysts said.

The National Development and Reform Commission announced Friday that it has asked China's major coal companies to keep prices stable in order to control inflation.


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Coal companies should honor the 2010 coal contract prices and return any additional charges from higher prices by the end of June, the NDRC said.

The measure marked the first such move in about two years and followed NDRC meetings with major coal companies, including China Shenhua Energy Co. (HK:1088 29.85, -0.90, -2.93%) (CUAEF 3.86, 0.00, 0.00%) , China Coal Energy Co. (CCOZF 1.40, +0.05, +3.70%) (HK:1898 10.48, -0.74, -6.60%) and Inner Mongolia Yitai Coal Co. (CN:900948 5.07, -0.31, -5.72%) , analysts at Bank of America's Merrill Lynch unit said in a note to clients.

"We see substantial concerns on coal price upside, given the unexpected cap on contract pricing," the analysts said.

They left their 2010 benchmark coal-price assumption unchanged, but lowered their estimate for 2011 to 598 yuan ($88) -- predicting a 5% year-on-year rise, down from a previously expected 14.6% increase.

The last time the government intervened in the spot coal market was in 2008, sending shares of Yanzhou Coal Mining Co. (HK:1171 15.74, -1.22, -7.19%) (YZC 20.51, -1.19, -5.48%) falling by more than 20%, they said.

Given that, analysts at Bank of America Merrill Lynch cut their rating on Yanzhou's stock to neutral and lowered the stock's price objective to 17 Hong Kong dollars ($2.19) from HK$20.

They also lowered their price objectives for Shenhua to HK$45 from HK$51, and China Coal to HK$16.50 from HK$19.

"Although we see short-term policy headwinds for [Shenhua and China Coal], that could be partially mitigated by the fact that their shares have fallen about 20% in the past few months," the analysts said, adding they expect "less downside" for Shenhua and China Coal compared with Yanzhou.

In late morning trading, shares of China Shenhua Energy fell 1.5%, China Coal Energy lost 4.8% and Yanzhou Coal fell 3.3% in Hong Kong, defying broader gains in the benchmark Hang Seng Index, which was up 0.6%.

In Shanghai, Yanzhou shares (CN:600188 17.84, -0.47, -2.57%) shed 1.7%, China Coal (CN:601898 9.05, -0.15, -1.63%) lost 0.8% and Yitai Coal fell 0.4%, as the Shanghai Composite traded 0.1% lower.

Elsewhere in the region, trading was mixed, with the Nikkei Stock Average down 0.3% and Australia's S&P/ASX 200 down 0.8%, but Korea's Kospi trading almost unchanged.

Power plus

While the NDRC's coal-price cap may pressure coal producers' shares, power producers are more likely to get a lift.

"If coal-price increases are successfully contained, the risk of IPPs [independent power producers] not obtaining [a] sufficient on-grid tariff hike and margin squeeze threat would diminish," the Merrill Lynch analysts said. On-grid power tariffs refer to the price level at which power plants sell electricity to grid companies.

Expectations for higher power consumption and certain government reform measures may also benefit power producers.

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"We believe the NDRC has been studying [a] relaunch of partial fuel-cost pass-through, tariff structure reform and on-grid tariff hike that if launched, would be viewed positively by the market for IPPs, as we believe IPP share prices do not reflect roll-out of such reforms," the analysts at Merrill Lynch said.

They raised their price objectives for certain IPPs, including Huaneng Power International Inc. (HNP 23.82, +0.87, +3.79%) (HK:902 4.66, +0.20, +4.48%) , Datang International Power Generation Co. (HK:991 3.32, +0.06, +1.84%) (DIPGY 8.45, +0.13, +1.56%) , Huadian Power International Corp. (HPIFF 0.23, +0.02, +7.16%) (HK:1071 1.94, +0.06, +3.19%) and China Resources Power Holdings Co. (HK:836 17.66, +0.58, +3.40%) (CRPJF 2.25, 0.00, 0.00%) .

The analysts also lifted their rating on Huaneng's stock to buy from neutral.

Power producers gained ground in Hong Kong, with shares of Datang adding 2.5%, Huadian up 2.7%, Huaneng rising 4% and CR Power gaining 3.5%.

In Shanghai, shares of Datang (CN:601991 7.02, -0.01, -0.14%) added 0.3%, while Huaneng Power (CN:600011 6.20, +0.08, +1.31%) shed 0.7%.

"Any roll-out of positive reform measures allowing IPPs to generate a more stable and higher margin/return would also be catalyst to drive share prices to our revised [price objectives]," they said, adding that they "prefer" CR Power, Huadian and Huaneng.

Myra P. Saefong is MarketWatch's assistant global markets editor, based in Tokyo.