Tuesday, 9 December 2008
Power Generation Plummets and May Struggle for Years
After power output growth declined into negative numbers in October, generation from power plants above designated size (state- and non-state-owned enterprises with an annual sales over 5 million yuan) in November may drop by 11% year on year. As barometer of the economy, declining power generation indicates increasing downward pressure on the economy as well as on power company profits.
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Power Generation Plummets and May Struggle for Years
CSC staff, Shanghai
7 December 2008
After power output growth declined into negative numbers in October, generation from power plants above designated size (state- and non-state-owned enterprises with an annual sales over 5 million yuan) in November may drop by 11% year on year. As barometer of the economy, declining power generation indicates increasing downward pressure on the economy as well as on power company profits.
An official of the China Electricity Council revealed last Friday that output of those power plants under the administration of the central government slumped 7% year on year in November, and that the power industry is doomed to losses this year.
This official predicted the thermal power industry’s 45.5 billion yuan net profit in the first eight months of last year would turn into a 21.6 billion yuan net loss over the same period this year, and the loss for the whole year would reach 70 billion yuan.
These losses are due mainly to insufficient demand.
China’s power demand is mainly determined by four industries besides the power industry itself, i.e. the production and processing of ferrous metal, production and processing of non-ferrous metals, the chemicals and the building materials industries. Retail power consumption accounts for only about 11.8% of the total. Due to the slowing of heavy industry, overall power consumption for the nation began a decline early in the year.
Supply will shortly exceed demand on the power market, and will need a year or more to rebound. 2009 looks to be a tough one for the power industry.
The demand decline has five power company groups suffering losses. Although Huaneng earlier maintained a slight profit from its diversified operation, it has failed to keep it up in the second half of the year.
A power group insider told China Business News that the biggest pressure came from fuel costs, which are now higher than the price the group can charge for power. The insider also cited costs of finance as another important factor.
Forming alliance with coal suppliers
As coal suppliers and power plants are both suffering weakening market demand, Zhang Guobao, vice-director of the National Development and Reform Commission and director of the National Energy Administration, suggests that alliances between coal suppliers and power plants could help to increase both industries’ risk management and profitability.
Since hard times set in in October, both industries have suffered drops in sales. According to Wang Mingsheng, chairman of Huaibei Coal Group, the coal price started falling in September and has fallen week by week since October. The price for coke has gone from about 3300 yuan/ton in September to 1300 yuan/ton now, while refined coal price has dropped from 2200 yuan/ton to less than 1000 yuan/ton. Ge Jiade, chairman of Wanbei Coal and Electric Power Group, said that not only was it hard to sell coal, they had difficulties in getting payment for goods already shipped.
Wang Zhengxian, chairman of the China National Coal Association, and Li Xiaopeng, vice-governor of Shanxi Province, China’s main coal producer, agree that alliance is the only road ahead for coal and power enterprises. They cited China Shenhua, China’s major coal supplier, with its total installed power generation capacity exceeding 16 million KW, as a good example of an integrated coal supplier/power generator.
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