Nov. 23, 2009, 12:04 a.m. EST
By V. Phani Kumar, MarketWatch
HONG KONG (MarketWatch) -- The snowstorm in parts of northern China may be blowing over, but for independent power producers on the mainland, the effect of rising coal prices from the extreme weather -- and increasing demand for electricity -- may last well into next year.
Earlier this month, pasts of resource-abundant northern China were hit by the worst snowstorm in decades, slowing transportation of coal, which is estimated to helped produce nearly 70% of the power generated on the Chinese mainland.
But while the impact on transportation of coal from the severe weather conditions has been limited, the lower-than-usual temperatures are boosting demand for heating and pushing coal prices higher. This comes on top of gains in electricity demand amid China's stimulus-driven economic recovery.
The rising demand, in turn, is spurring shares of the Chinese coal producers but is hurting power utilities sensitive to the cost of coal, with analysts fearing the recent upward trend in coal may force electric companies to sign contracts for sourcing coal in 2010 at elevated price levels.
"We believe there will be mounting [upward] pressure on 2010 contract coal prices after the 15% rise in spot coal prices," analysts at Deutsche Bank wrote in a report Monday, referring to coal prices last week, which were at a 15% premium to the average so far in 2009.
"The widening price gap between contract and spot coal puts enormous pressure on independent power producers' blended coal-price outlook in fiscal 2010," they wrote.
Furthermore, "the faster return of an inflation and interest rate up-cycle in 2010 ... would further darken the sector outlook," as China's independent power producers have a high level of gearing after their rapid business expansion, making them vulnerable to interest-rate hikes expected next year.
Deutsche Bank downgraded Huaneng Power Interantional Corp. and China Power International Development Ltd. to hold from buy, and cut Huadian Power International Inc. to sell from buy, while keeping its rating on Datang International Power Generation Co. at sell.
The brokerage also retained its buy rating on China Resources Power Holdings Co., saying the company is "better hedged in terms of fuel-price uncertainty."
In Monday morning trading in Hong Kong, all those stocks were trading lower, with Huadian Power (HK:1071 2.26, -0.05, -2.16%)
(HPIFF 0.32, +0.02, +6.78%) off 1.7%,
Huaneng Power (HNP 26.09, -0.27, -1.02%)
(HK:902 5.01, -0.05, -0.99%) down 0.6%,
Datang International (HK:991 3.66, -0.05, -1.35%)
(DIPG.Y 9.40, -0.01, -0.11%) sliding 1.1%,
China Power (HK:2380 2.19, -0.03, -1.35%)
(CPWIF 0.30, +0.02, +5.26%) declining 0.9%
and China Resources Power (HK:836 15.76, -0.14, -0.88%) falling 0.5%.
In Shanghai trading, shares of Datang International (CN:601991 9.93, -0.07, -0.70%)
dropped 1.8%, Huaneng Power (CN:600011 8.49, -0.05, -0.59%) lost 0.8% and Huadian
Power (CN:600027 5.83, -0.02, -0.34%) shed 1.7%.
Coal producers, as well as integrated power producers with their own coal-mining operations, by contrast, continued to rise.
Shares of China Coal Energy Co. (HK:1898 13.52, +0.26, +1.96%)
(CCOZF 1.82, +0.03, +1.68%) added 1.8%, and Yanzhou Coal Mining Co.
(HK:1171 15.30, +0.34, +2.27%)
(YZC 19.28, +0.06, +0.31%) added 2%. In Shanghai,
Yanzhou shares (CN:600188 22.08, +0.21, +0.96%) gained 0.1%, while China Coal
(CN:601898 14.83, +0.10, +0.68%) slipped 0.5%.
In wider market activity, Hong Kong's Hang Seng Index gained 0.5% to 22,573.14, while the Shanghai Composite Index advanced 0.1%.
Elsewhere, Australia's S&P/ASX 200 rose 0.5%, South Korea's Kospi slipped 0.1% and Taiwan's Taiex advanced 0.1%.
Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.
Source: http://www.marketwatch.com/story/coal-price-rise-dogging-chinese-power-companies-2009-11-23?siteid=
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