Power firms face profit squeeze

PUBLISHED : Wednesday, 03 August, 2005, 12:00am
UPDATED : Wednesday, 03 August, 2005, 12:00am

Despite excess demand, most of China's listed power companies are expected to report substantial drops in interim profit on the back of higher coal costs.

Although power shortages continue, reaching a peak in the summer, analysts say that could change in the next two years thanks to a glut of new generation capacity.

Profitability will come under increasing pressure and will hinge on an easing of coal prices and the degree of implementation of a new, competition-based tariff framework, they say. The additional capacity also threatens to lower plant utilisation and cut tariffs.

Report cards would not look good, analysts said.

Mainland-listed Shanghai Electric Power, one of the largest power producers in the city, yesterday posted a 20.51 per cent year-on-year fall in interim net profit to 182.33 million yuan, despite a 30.61 per cent jump in generation volume. A 30.2 per cent rise in unit coal costs was blamed.

Three of the five Hong Kong-listed producers due to report interim results this month - China Power International Development, Huaneng Power International and Huadian Power International - are expected to post year-on-year declines of 29.3 per cent to 40 per cent, according to estimates by ABN Amro and Macquarie.

Datang International Power Generation, which benefits from lower coal transportation costs because its plants are located near mines, is forecast to post a 5.2 per cent to 6.9 per cent rise in interim profit. China Resources Power's lower coal cost increase and higher generation growth may help it post a profit rise of 24.3 per cent to 30.9 per cent, according to estimates.

The grim forecasts run counter to tight supply in the market but a failure to match coal cost increases with state regulated tariff rises on inflation concerns resulted in profit margin erosion for the producers.

According to Zhou Feng, the director of the State Power Economic Research Centre's department of power demand studies, the nation's peak power shortage will amount to 30,000 megawatts (MW) this summer, not far short of last year's record 35,000 MW. The national generation capacity was 440,000 MW at the end of last year.

In the first half, only 14,000 MW of installed generation capacity was brought online, but a series of new plants is expected to be added in the next three years, with about 56,000 MW due to be completed in the second half of this year, Mr Zhou said.

This year, China's power plant capacity growth is expected to exceed power consumption growth, for the first time since 1999, and this trend is expected to continue until at least 2007, according to a UBS research report.

Controlling unauthorised projects has become a government priority to prevent over-supply, which is expected to appear by 2007. A supply glut, coupled with the central government's implementation of competitive tariff bidding, would see weaker operators suffer as power grid operators bought power from more efficient plants.

Chang Jianping, deputy director-general of the department of power market regulation at the State Electricity Regulatory Commission, said about 40 per cent of power sold in the three northeastern provinces was already subject to some tariff competition.

Tariffs have dropped a few percentage points since bidding started late last year.

'Next year, the eastern China power grid will enter actual trial runs on bidding while mock bidding will start in the central China and southern China grids,' he said.

Offsetting any tariff reduction will be an easing of coal costs but analysts do not expect any substantial fall this year.

Shenyin Wanguo Securities coal analyst Mou Qijing expected spot market prices of coal used to fire plants to remain stable for the rest of this year and fall 10 per cent to 15 per cent next year.