Two key mainland power producers issued profit warnings yesterday, saying that their first-quarter earnings would be seriously eroded by surging coal costs and tightly controlled electricity tariffs. The warnings from Huaneng Power International, the Hong Kong and Shanghai-listed flagship of the mainland's largest power producer, and Yangtze Power, the operator of the Three Gorges hydroelectric dam, confirmed concerns raised by government officials on the industry's profitability. Huaneng said its first-quarter profit might have fallen more than 50 per cent due to a 'significant increase of thermal coal prices'. The company generated 18.6 per cent more electricity of 46.1 million megawatt-hours in the first three months. Yangtze Power also said its first-quarter earnings would drop between 30 per cent and 40 per cent from a year ago due to rising costs and less power generation. Mainland companies cannot pass on higher costs to users as the government controls electricity prices to limit the impact on consumers. Power producers posted a 'significant' drop in profit in January and February because of rising crude oil and coal prices, said Li Xiaochao, a spokesman for the National Bureau of Statistics. Earlier this month, an official at the State-owned Assets Supervision and Administration Commission said about 70 per cent of state-owned power plants were making losses. Pierre Lau, an analyst at Citigroup, said Huaneng's margin would remain under pressure as unit fuel costs in the first quarter were expected to jump more than 20 per cent while electricity tariffs rises were unlikely to come soon given the country's high inflation. Spot coal prices at Qinhuangdao port had risen 28 per cent year on year to average 615 yuan a tonne in the first quarter of this year because of tight supply and spillover effect from high overseas coal prices, Mr Lau said. The investment bank has downgraded Huaneng to 'sell' from 'buy' and cut its earnings forecast by 10 per cent to 14 per cent for this year to 2010 on higher fuel costs. Citigroup now expects Huaneng to post a net profit of 3.79 billion yuan this year, against 6.16 billion yuan last year, and profit will continue to shrink to 3.66 billion yuan next year before a rebound in 2010 to 4.75 billion yuan. Huaneng is due to report first-quarter earnings on Tuesday. It posted a profit of 1.2 billion yuan in the first quarter of last year.