China Coal Energy reported yesterday a 17.9 per cent year-on-year decline in first-half core operating profit, after cost reductions failed to offset lower sales volume and selling prices. While the mainland's economic recovery boded well for energy demand this second half, the company warned that increased supply from more coal mining and higher taxes might threaten profitability. The listed unit of China National Coal Group, the country's second-largest coal producer, recorded a core operating profit of 5.37 billion yuan (HK$6.09 billion), down from 6.54 billion yuan a year earlier. Net profit, however, rose 3.1 per cent to 4.35 billion yuan, helped by lower finance costs and a 166 million yuan gain from selling a stake in China Cosco Holdings. China Coal recorded a huge paper loss on the stake last year after China Cosco shares shed value when the stock market bubble burst, but the firm realised a gain this year after the market recovered partially. The decline in core profit stemmed from a 10.2 per cent drop in coal sales to 41.13 million tonnes, largely because of a 73 per cent plunge in export volume to 1.48 million tonnes. Also hurting the firm's profit was a 5.1 per cent fall in the average selling price of its clean coal to 423 yuan a tonne. Much of the blame for the price decline fell on power-station coal, where the average export price slid 20 per cent to 533 yuan a tonne. Domestic power station coal, which accounted for 96.7 per cent of sales of self-produced coal, saw its average cash market price drop 33 per cent, but this was more than offset by a 14.6 per cent rise in long-term contract prices. Long-term contracts accounted for 84 per cent of sales of self-produced coal. The company said the cash market price of coal dropped after a decline in power demand on the mainland as the economic downturn crimped power usage by big consumers such as metal smelters. China Coal's results were better than some analysts' forecasts. Brokerage UOB Kay Hian had expected a net profit of 3.8 billion yuan, assuming its production costs would rise 7 per cent. But production costs for self-produced coal fell 3.8 per cent to 265.81 yuan per tonne. For the second quarter, net profit grew 3.3 per cent year on year to 1.67 billion yuan after a 3.6 per cent decline in the first half, based on mainland accounting standards. An analyst attributed the improvement to conservative assumptions of first-quarter contract prices amid a stalemate in contract negotiations with power producers. These prices were subsequently written back after contracts were signed in the second quarter.