Caixin
Nov 25, 2016 07:50 PM
BUSINESS & TECH

Chinese Power Producers' Profits Dim Amid Coal-Price Surge

The power plant of China Huaneng Group is seen in Huai'an, Jiangxi province. Photo: IC
The power plant of China Huaneng Group is seen in Huai'an, Jiangxi province. Photo: IC

(Beijing) — Profits at China's five largest power generators have all declined in the first nine months ending Sept. 30 due to a surge in coal prices after the government squeezed production.

The big five producers saw their combined profits shrink by a third to 26 billion yuan ($3.8 billion) in the first three quarters, according to Wind Information, a Chinese financial data provider.

Beijing-based Datang saw the biggest drop in profit among the big five with a decline of nearly 80%. Net income of Huaneng, China's biggest listed power generator, dropped 29% to 11 billion yuan during the same period. The top players also include GD Power Development Co. Ltd., Huadian Power International Corp. Ltd. and Shanghai Electric Power Co. Ltd.

Recent price spikes in thermal coal, which is used to generate power, is the main factor that has eroded power producers' profits, analysts said. The Bohai-Rim Steam-Coal Price Index, which measures domestic thermal coal prices, has risen more than 60% from the beginning of the year, after the government ordered mines to cut production to trim overcapacity and fight pollution. This has lead to a coal shortage heading into the cold winter months when demand typically peaks.

Since September, the government has adopted various measures to cool prices. Earlier this month, two of the country's largest coal producers, Shenhua Group Corp. and China National Coal Group Corp., signed a one-year contract with the top five power generators to supply thermal coal for 535 yuan per ton to keep prices stable.

The National Development and Reform Commission (NDRC), the country's top economic planner, temporarily eased an earlier mining restriction last week, allowing coal mines that "meet work safety standards" to resume working for 330 days a year to increase output, up from 276 days, before the heating season ends in March. 

"These two policies have had an impact on cooling coal prices by reassuring the market that there will not be a shortage of coal and showing the government's determination to prevent a surge," said Li Ting, an independent industry analyst.

The Bohai-Rim Steam-Coal Price Index declined for the first time earlier this month to 606 yuan per ton after 42 consecutive weeks of growth. The index continued to drop and stood at 601 yuan per ton on Wednesday.

Zhang Yeqing, a researcher at chemicals, energy and fertilizers market information provider ICIS, said coal prices have stabilized at this point, adding that a decline in power plants' profits will also slow down.

However, the recent step to increase the number of days pits can operate will not push up output significantly because it was temporary, and this casts a shadow on future coal price stability and power producers' profitability, Li said. Also, as the country is pressing ahead with its campaign to cut overcapacity in the coal mining industry, it will take longer for coal prices to return to their previous low levels, Li added.

Contact reporter Chen Na (nachen@caixin.com); editor Poornima Weerasekara (poornima@caixin.com)

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