China's energy companies are beset by overcapacity and plunging profits. Yet state-owned China Shenhua Energy, the country's largest coal producer by volume, is moving in the opposite direction -- raising sales targets and investment in power generation.
China Shenhua Energy's Chairman Zhang Yuzhuo, third from right, and Vice-chairman Ling
Wen, fourth from right, at the first-half earnings briefing on Aug. 29. (Photo by Jennifer Lo)
Shenhua said on Monday it would increase its forecast for 2016 coal sales by 4.4% to 355 million tons, after meeting more than half of its full-year target buoyed by a recent rebound in coal prices. While coal production will remain largely unchanged, the group would boost capital expenditure to 275 billion, up nearly 38% from its target set in March.
"The increase in capital expenditure is primarily driven by our investment in coal-fired projects," said Vice Chairman Ling Wen, adding that power projects were able to absorb about a quarter of its coal sales last year and generate alternative income. The power segment will account for three-quarters of its capex for the year, the group said.
The bullish move came at a time when China is experiencing excess power capacity as its economy slows. Many coal-fired power producers are facing a multi-year profit down-cycle, coupled with rising competition from alternative energy such as hydropower, nuclear and wind energy.
Shenhua has not been spared. Its first-half net profit fell 19.3% to 10.8 billion yuan ($1.62 billion) from a year ago. Coal production and power generation volume barely rose in the first six months, edging up less than 1% from a year earlier.
Revenue was down 12.5% to 78.7 billion yuan, dragged lower by attempts to overhaul China's coal-mining sector. In April, the central government introduced production caps and reduce the number of statutory working days for coal miners to 276 a year, down from 330, following the closure of mines to fight pollution.
Entering the second half, the group expects earnings to improve from the first half as Beijing's supply-side reform is starting to "bear fruit" and has sent coal prices higher. The benchmark price for Asia -- prices for Australian thermal coal shipped from its Newcastle terminal -- has soared more than a third since mid-June.
But Chairman Zhang Yuzhuo said coal prices would not rise continuously and likely "fluctuate within a reasonable range," pending the government's reform agenda and a shift in seasonal demand. Air-conditioning typically drives up peak demand for the fuel during summer in northern China.
Asked whether Shenhua would boost coal exports to markets like Japan and South Korea to tackle a supply glut like before, Zhang said: "It's now a very different situation as the coal market has improved... We tend to import more and export less this year."
Others express concerns over its moves to drive direct power sales in an increasingly competitive power market still plagued by overcapacity.