Harbin Power Equipment said the power plant equipment market in the coming year will be hurt by soaring steel costs and the rising yuan.

    "The industry will face tremendous challenges amid fierce market competition, shortages of special raw materials, and rising material and energy prices as well as ongoing yuan appreciation," said Qu Dazhuang, general manager of the company.

    Contract prices of iron ore, a major material in steel making, gained as much as 97 percent in the first half, according to Baoshan Iron & Steel (Baosteel). The country's biggest steelmaker felt the urge to pass on the higher costs.

    The yuan has appreciated 6.6 percent so far this year, and economists predict it will continue to appreciate by 8 percent to 10 percent in 2008, as policy makers try to cool overheating economy.

    Liu Zhiquan, deputy general manager of Harbin Power, said the company will control its exports at about 20 to 25 percent of total sales to minimize the losses from selling products overseas.

    Harbin Power, the country's second biggest maker of electricity-generation equipment, saw its first-half gross profits jump nearly 31 percent compared with a 9.26 percent drop in net profits during the period, as soaring costs eroded the company's profit margin.

    Its net earnings dropped to 558.1 million yuan, or 0.41 yuan a share, from 615 million yuan, or 0.46 yuan, a year earlier, the company said in a statement to the Hong Kong stock exchange. Sales climbed 7.5 percent to 12.9 billion yuan.

    Turnover was 12.85 billion yuan, up by 7.46 percent.

    "Harbin Power's earning risk is high amid margin decline due to rising steel prices where its net profit has high sensitivity," said Pierre Lau, an analyst at Citigroup.

    Harbin Power, listed in Hong Kong in 1994, received strong demand in the first six months. The contract value of new orders hit 34.3 billion yuan, an increase of 55 percent compared with the corresponding period in 2007.

    Liu believes the country's power supply will continue to see strong demand in the coming years, which will translate the orders into more power equipment orders.

    As the government puts coal-fired power plants under control and encourages nuclear energy, the company will enhance its product diversity to make new models of power generation equipment, Harbin Power said.

    Harbin Power is the third largest market player after Dongfang Electric in Sichuan and Shanghai Electric.