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Power companies struggle with shrinking profits

By Wang Lan (China Daily)
Updated: 2008-06-09 10:41

Zou and some analysts expect the third round of power price rise is likely to take effect after the CPI is brought back to a moderate level. To cope with coal price rise and reduce power companies' cost burden, the government adopted two rounds of electricity price rises in May 2005 and May 2006, raising prices by 0.0252 yuan per kWh.

The curb on power prices, meant to stem inflation, has prevented electricity companies to pass the cost increase to consumers. But some economists believe an electricity price hike would not necessarily cause an overall CPI rise.

Jonathan Anderson, an economist at UBS Securities Asia, says in a recent report: "household exposure to electricity prices, including estimated indirect effects, is 7 to 8 percent of the CPI, so a 10 percent increase would push up the overall CPI by less than 1 percent. Even a 30 percent hike would yield a one-off CPI increase of less than 2.5 percent, hardly comparable to the impact of the recent food supply shocks."

Mining stakes

Some power companies have started making stake purchases from coal mines to reduce reliance on coal suppliers and minimize the impact of the coal price surge.

"Building up a complete industry chain by including both upstream and downstream enterprises can help electricity producers control costs efficiently," says Li Zhaokui of Huaneng Power.

According to Li, Huaneng Power owns and operates coal mines with a capacity of about 20 million tons in Northeast China's Manchuria city. "Supplies from our coal mines feed some of our production and help alleviate the pressure resulting from coal price surge."

Like Huaneng, other State-owned power firms are also running their own coal mines. Datang Power has said it will purchase a 51 percent coal mine stake for 3.4 billion yuan in Inner Mongolia.

Industry experts and analysts say major domestic power generators are operating their own coal mines to secure a stable fuel supply at a time when coal prices are expected to go even higher.

"Power companies have to integrate the upstream resources to source sufficient coal and support production," says Zou at Changjiang Securities. "With time, it will get more expensive for electricity companies to integrate coal mines."

Experts say the transportation bottleneck has also contributed to the coal price surge. Because of the much higher transportation cost through highways, 70 or 80 percent of the coal is transported in China through trains.

Richard Wei, a chartered financial analyst at UBS Securities Co, says the expanded railway capacity for transporting coal is far from adequate to handle the rising demand for coal.

Daqin and Shuohuang railways, the two major coal transporters, are expected to increase their capacities of 50 million tons and 30 tons respectively in 2008. Apart from these two, the transportation capacities of most coal railways have become saturated.

"There's going to be a large transportation gap in the coming years, which is expected to push up coal prices even further," says Wei.

Instead of price movements or fiscal subsidies, analysts worry the most pressing issue for China's economy over the next 12 months could well be the plain availability of coal.

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