CHINESE utility shares fell yesterday after Huaneng Power International Inc and Huadian Power International Corp said they expected to post net losses in the first half blaming surging coal costs and a freeze on tariffs.
In Hong Kong, Huaneng fell 1.57 percent to HK$5 (US$0.64) after tumbling 5.9 percent, and Huadian shed as much as 4.95 percent before ending 0.5 percent up at HK$2.03. In Shanghai, Huaneng lost 3.17 percent, Huadian dropped 5.67 percent and Datang International Power Generation Co plunged 7.01 percent.
Their loss warning came despite a sharp rise in power output. Huaneng, China's largest, said first-half generation rose 13.4 percent to 91.4 billion kilowatt hours, while Huadian generated 64.77 percent more to 47.6 billion kWh. "The loss is mainly due to a bigger than expected rise in coal prices," CICC analyst Chen Junhua said. The fuel fires three quarters of the country's power capacity.
Huaneng earned 2.94 billion yuan (US$431 million) in the first half in 2007 while Huadian netted 546.4 million yuan.
China hadn't raised electricity tariffs before a moderate hike this month since June 2006 to counter inflation, with rising coal rates hitting power firms' bottom lines.
Domestic power firms secure most of their coal supplies via annual contracts, with the rest fed by the more pricey coal in the spot market. With soaring spot coal prices which widened the differential between contract and spot prices, many miners didn't fulfill sales contracts, forcing generators to buy more spot coal.
JPMorgan Chase & Co said the spot coal price surge over the past 10 weeks meant Huaneng's unit fuel costs could rise by 34.7 percent in 2008 and 17.5 percent in 2009, sharply higher than previous estimates. Analysts said the power sector's performance may worsen in the second half if coal prices continue to bite, as the moderate tariff hike effective this month won't be able to fully offset the fuel costs. Under the July 1 hike, Huaneng lifted tariffs charged by its coal-fired plants by an average 5.16 percent and Huadian 4.77 percent.
"In order to at least partially help offset such steep coal cost increases, there will probably need to be another sizable tariff increase by January 2009 and perhaps another one in July 2009 before we see a more meaningful earnings recovery in 2010,'' JPMorgan said.