China’s coal-fired power producers face tougher times
China’s coal-fired power generation industry faces a double whammy of overcapacity and rising competition as a result of gradual power price liberalization, even though profitability has been propped up by sinking coal prices in the past few years, the South China Morning Post reported on November 30.
Analysts say power producers will have to exercise restraint on new capacity expansion, or else risk seeing utilization fall below last year’s 15-year low and eat into profit margins, especially if coal prices find a bottom after four years of precipitous falls.
“Power plants built this year were planned four to five years ago, so it will take some time for the large supply of new plants proposed and approved when demand was good to be digested,” the director of Xiamen University’s Centre for China Energy Economics Research, Lin Boqiang, said.
“It will be up to the power firms to control the actual amount of plants to be built.”Based on recent months’ growth figures on power demand and generating capacity, the trend of worsening over-supply has yet to turn the corner.
According to a joint research paper by environmental protection campaigners Greenpeace and North China Electric Power University, the mainland’s coal-fired power industry’s capacity utilization is likely to fall 8% year on year to 4,330 hours this year.
In the first 10 months of the year it declined 7.9% year on year to 3,563 hours.
The full-year estimate compares with last year’s 4,706 hours, which was 6.1% lower than in 2013, and is
much lower than the 4,719 hours recorded in 1999 in the depths of the previous industry down-cycle and the global financial crisis.
Lower utilization squeezes producers’ profit margins as more fixed costs like depreciation and plant maintenance have to be borne by the same amount of power sold.
As Beijing steers the nation from investment and labor intensive manufacturing-led economic growth to a more balanced model with greater emphasis on services and technology-based economic activities, year-on-year power demand growth slowed to 0.7% in the first 10 months of this year.
This compares to 3.8% last year, and 12% in 2011 when the economy recovered on the back of Beijing’s 4 trillion yuan stimulus programme. Industrial power consumption, which accounted for 72% of the mainland total in the first 10 months of the year, fell 1.1% year on year in October, steeper than the 1% fall in September.
However, on the supply side, the mainland’s total power generating capacity grew by 82.6 GW in the first 10 months of the year, 43% higher than 57.7 GW in the same period last year.
Of the total, newly installed coal-fired capacity amounted to 43.4 GW, up 54% year on year from 28.1 GW.
China Resources Power (CRP) and Huaneng Power International (HPI), the two most profitable mainland power generators listed in Hong Kong, have seen their share prices fall 18-20% in the past month, underperforming a 3.6% decline in the Hang Seng Index, despite the main benchmark power-station coal price index having fallen a further 2.5% in the period.
Both firms generate 90% or more of their power output from coal.
But the room for further falls in coal prices is increasingly limited as more high-cost mines are forced to shut down, with the vast majority of China’s coal miners loss-making,
Even the coal industry’s most profitable firm, China Shenhua Energy, is expected to post a small fourth-quarter net loss, despite having substantial, profitable power generation and coal logistics operations to offset any losses from coal mining, according to a research report by Barclays.
The mainland’s coal-fired power producers are, however, expected to see their power selling prices cut soon, under Beijing’s pricing mechanism that links price movements for power to coal prices on a lagged annual basis.
According to Beijing’s price reform guidelines, energy prices are supposed to be liberated by 2017, which means power prices would at least be partially determined by market forces. Currently, the vast majority of power sold is based at state-stipulated prices, except for a small but rising amount sold at prices directly negotiated between producers and large industrial users.
The coal-fired power industry is also expected to face higher environmental compliance costs from 2017 when carbon emission caps are expected to be slapped on the mainland’s biggest industrial polluters.
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