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China power crisis fades, deeper troubles linger – analysis

The power crisis that gripped China this summer has eased as demand and coal prices retreat, but interventions used to temper the blackouts have exacerbated damaging policy uncertainties hanging over the sector.

China faced its worst summer shortages in four years over July and August because generators could not get enough coal or were unwilling to rack up losses paying fuel prices that rose far faster than state-set electricity tariffs. To minimize outages during the peak demand period, which coincided with the Olympic Games, Beijing brought in coal price caps and raised power tariffs twice in two months, though the modest increases left many generators still in the red.

Power production rose only 5% in August, the slowest rate this decade and an anomaly in a country that usually registers double-digit growth, on output cuts by generators and the forced closure of some factories during the Olympics. Now, cooler weather means less energy-guzzling air conditioning, weak manufacturing has undermined demand growth in the south, and coal supplies have recovered. But for China’s energy policymakers the respite offered by a largely seasonal slowdown in power demand is little more than a chance to lick their wounds before plunging back into the action.

The government has already warned winter may bring an unusual recurrence of shortages, as miners struggle to dig up and ship enough coal and power plants scrabble to pay for it, all while coping with an ailing transport and transmission infrastructure. And the decision to bring back caps on coal prices, after Beijing quietly mothballed a mechanism linking fuel and power prices, will only make it harder for firms to invest in efficient mines and plants that are key to a long-term solution. “This is a sector that is riddled with policy risk. (The government is) trying to meddle with price caps on coal, and dictating tariff increases in an arbitrary fashion,” said Simon Powell, head of power research at CLSA in Hong Kong. “I can’t predict earnings for the firms, this year or next.”

 
LOSSES AHEAD

China burns over 2 billion tons of coal a year, and demand increases by about 10% each year, analysts say. Each year the country has to dig up and transport another 200 million tons of the jet black fuel, roughly equivalent to top exporter Indonesia’s entire annual production. Booming global demand is adding to supply strains and bolstering prices, which Chinese power firms are not allowed to pass on to consumers because power tariffs are state-set. Those unable to buy coal or unwilling to rack up heavy losses, have simply turned off their generators.

Beijing did raise prices twice in two months this summer to placate firms sliding into the red. But the cumulative 10% increase -- the first significant rise in two years -- paled next to the climbing fuel costs and was not passed on to retail consumers. And although this was enough to shutter some metal smelters already operating at thin margins, it is far below what the government has pledged as part of an energy efficiency drive to encourage conservation and fund cleaner, greener projects. Instead the ad hoc, limited tariff rises, suggest other economic concerns have higher priority and power firms may need to prepare for intermittent stretches of imposed unprofitability that refiners have struggled with in recent years.

Big firms are already suffering, although some own mines or are powerful enough to bargain with suppliers. Listed giant Huaneng Power posted a higher-than-expected first half loss and said they did not see the coal supply crisis “easing significantly” in the short-term. Huadian Power slid into the red in the H1 of 2008, Datang International posted a 78% fall in net profit, and at China Resources Power Co Ltd, net profit was down 29%.

 
SAFETY WORRIES

Beijing’s pledge to liberalize power prices was originally part of a government push to make better use of China’s energy resources by forcing users to be more careful with them. But the cash is also desperately needed by producers trying to consolidate and upgrade mines that are the world’s deadliest. Deaths in 2007 fell 20% from a year before, though 3,786 were killed in blasts and other accidents. Now the government may be tempted to loosen pressure for change. “We expect small coal mines to start operation now and production to increase,” said Daisy Zhang at BNP Paribas. Even that will not be enough to end the shortages though, as the number of plants grows in tandem with the economy.

Railway capacity is expanding too slowly, though Beijing has promised billions of yuan for expansions and upgrades to help move 70% more coal out of inland provinces by 2020. “Transportation will take a while to improve, another two to three years to completely solve this bottleneck,” said Zhang. (Reuters)