Chinese coal-fired power shares underperform after Beijing decides against lifting prices

Shares of mainland Chinese coal-fired power producers listed in Hong Kong ended flat or fell slightly on Thursday after Beijing decided not to lift the prices they charge for their electricity despite higher coal prices.

Ratings agency Fitch said the decision, posted on regulator National Development and Reform Commission’s website late on Wednesday, will squeeze their profit margins in 2017.

“Margins are also expected to suffer as more electricity is sold under direct power sales programmes at a discount to the benchmark on-grid tariffs, as well as from falling plant utilisation levels,” Fitch said in a statement on Thursday.

According to Beijing’s price formula that links power price adjustments to coal price movements, benchmark power prices charged by coal-fired producers to distributors should have been lifted by 0.18 fen per kilowatt-hour.

But the NDRC decided that changes less than 0.2 fen would not be made, but will be taken into account in the next review period, Fitch said. Reviews are conducted annually.

Although Fitch expects benchmark power-station coal prices at the Qinhuangdao port to fall further after a 15 per cent decline from the peak in the fourth quarter of 2016, it expects the average coal prices for the first half of 2017 to be higher than that of 2016, implying a potential margin squeeze for power producers.

A 62.8 per cent jump in power sold under direct negotiations and transactions between power producers and major power users in 2016 also squeezed profits, since such sales attract an average 18 per cent discount to the national average benchmark on-grid tariff set by the state.

The introduction and expansion of direct power sales is part of Beijing’s power price reform to make it more market-oriented and make power generation more efficient.

Direct sales accounted for 12 per cent of mainland China’s total power demand last year, Fitch said.

Shares of Huaneng Power International closed 0.8 per cent lower on Thursday at HK$5.04, while China Resources Power edged up 0.3 per cent and Huadian Power International dropped 1.5 per cent to HK$3.38, all underperforming the Hang Seng Index’s 1.5 per cent gain.