Earnings at mainland power producers will continue to face pressure this year as long as Beijing keeps a tight grip on power prices while maintaining a hands-off policy on coal prices. '[Power producers] are likely to suffer from margin squeeze and earnings deterioration despite [revenue] strength,' says BOC International utilities analyst Peter Yao Sheng in a research note. For power companies, the key to profits is coal prices, which account for more than 70 per cent of their operating costs. And coal costs are largely tied to results of the annual coal contract negotiations between coal and power producers, which began in mid-December. Some 1.1 billion tonnes may be contracted for if the typical situation holds, which is that 70 per cent of demand will be met by contracts under term deals. In early 2009, contract talks dragged on for four months due to huge price expectation differences between the buyers and sellers. For 2010, analysts expect the talks to be easier, as the trend of demand recovery and winter supply tightness is clear to both sides at the negotiating table. Buoyed by a 19.2 per cent jump in manufacturing output, mainland power generation soared 26.9 per cent year on year in November, the sixth consecutive rise and the fastest growth in nearly four years. On the supply side, the closure of many small coal mines in Shanxi province has tightened limited output growth in the short term. Mainland press reports say contracts signed so far mostly carry price increases of 8 per cent to 10 per cent. What is important to profitability but still unknown is how much Beijing will let power tariffs increase to compensate for higher coal costs.
