Impending energy price rise boosts shares of Chinese power producers
Shares of Chinese coal-fired power generators surged as much as 6 to 8 per cent on expectations of a wholesale power price increase next month, which is likely to bolster profits that have been dented by surging coal costs in the past two years.
The increase in the benchmark power price will coincide with the cancellation or reduction of various government levies borne by state-owned power distributors and end-users, a move aimed at cutting manufacturers’ energy cost.
Based on both factors, Citi estimates that power producers could see their profits rise by a quarter this year.
News of the wholesale energy price increase and tax reductions appeared in a circular issued by the regulator, the National Development and Reform Commission, to local governments, which was posted on the website of industry portal shoudian.bjx.com.cn.
“The levies relief will make room for coal-fired power producers’ benchmark wholesale tariffs to rise, relieving their operating difficulties,” the circular said, adding that it will take effect on July 1.
A tax on power sales introduced at the start of last year will be cancelled. It was launched to fund compensation to staff made redundant under Beijing’s policy to shut down outdated excess coal mining and steel smelting capacities, as part of “supply side” economic restructuring.
Two other levies to fund major water conservancy projects and the resettlement of villagers displaced by hydro power projects will both be cut by 25 per cent.
It is not clear whether the total cost impact on end-users from the tariff relief will match or exceed the opposing effect of the wholesale power price increase.
Provincial, municipal and district governments had to submit proposals to the NDRC by Thursday , based on the policy objective outlined, the circular said.
The NDRC’s move was a surprise to the market as analysts had previously not expected the next coal-fired tariff adjustment to take place until early next year.
The benchmark tariffs’ role in determining power producers’ average realised tariffs is diminishing as Beijing’s reform increasingly allows power prices to be determined by market forces rather than the state.
Hong Kong and Shanghai-listed Huaneng Power Internatonal, Datang International Power Generation and Huadian Power International surged between 6 and 8 per cent soon after trading began, but gave back most of the gains to close only 1.2 to 1.7 per cent higher, respectively.
China Resources Power, regarded a bellweather in the sector by profitability, kept most of its peak 7.1 per cent intraday gain to close 4.8 per cent higher.
Citi’s head of Asia-Pacific utilities research, Pierre Lau, projected in a note that the average benchmark coal-fired levy would be raised by 3.7 per cent on July 1.
His estimate is based on the current average tarriff of 36.4 fen per kilo-watt-hour, as well as the three levies - ranging from 0.66 fen to one fen per kWh - that will be cancelled or cut.
The estimate also assumed the spot market price of coal with a 5,500 kilo-calorific value (heating value) at Qinhuangdao, China’s largest coal port, would fall to 500 yuan a tonne by the end of this year from 574 yuan on Wednesday.
Based on his forecast, the net profit of the power producers could be boosted by an average 26 per cent this year, with a six-month impact from the raising the tariff.
But a spokesperson at a subsidiary of China Guodian Group, one of the five state-owned power generation groups, said it is too early to predict the size of the tariff increase.
There is also uncertainty over whether the proposals submitted to the NDRC will be approved, she added.