China’s coal miners have been on a tear. Contract pricing has just been deregulated and shares of its industry leaders are up a fifth on average in just over a month – outperforming even Shanghai’s broad-based market rally. Given the supply and demand situation, however, the gains do not add up.

The reforms allow miners and utilities to set so-called key contracts without reference to the regulator. Up to a third of power contracts had been set by this mechanism, which Beijing used to help restrain energy price inflation. Normal contract coal prices are slightly below the spot price but in Shanxi, the biggest producing region, they are Rmb20/tonne higher than last year’s key contracts. Achieving that Rmb20 rise would lift, say, earnings per share at China Coal Energy 8 per cent, according to Citigroup, while China Shenhua could see earnings rise 3 per cent.

The bottom line, however, also depends on the direction of the long-term coal price. This does not look so good. Spot prices at Qinhuangdao, the world’s biggest coal port, are about Rmb635/tonne, a third below their peak a year ago and in spite of winter demand, little changed from their summer doldrums when production cuts finally put a floor under the price. Yet now China’s miners are keen to increase output. Overall production from the biggest coal regions is set to rise about a fifth, or 450m tonnes, by 2015, Jefferies estimates, while China’s likely demand will rise less than 100m tonnes. And transportation bottlenecks from Shanxi that had for years helped boost prices are also easing. The result seems certain to be weaker domestic and seaborne prices without a strong economic pick-up.