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Chinese power producers face multi-year profit down-cycle amid excesses and market reform

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Workers install wires on an electricity pylon in Chuzhou, Anhui province on May 25, 2015. Photo: Reuters

The mainland’s power producers are facing a grimmer profit outlook in the next few years, due to tepid power demand growth and sharp falls in plant utilisation amid fast-growing generating capacity and industry reform aimed at raising price competition.

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Analysts said overcapacity, weak demand growth and intensifying competition remain the top worries for power producers, especially among coal-fired producers that are increasingly squeezed by renewable energy producers.

“The [Hong Kong-listed mainland] coal-fired power producers’ profit declines of 11 to 22 per cent in this year’s first quarter should mark the start of a multi-year earnings down-cycle with mounting oversupply and pricing pressure,” said Credit Suisse regional head of utilities research Dave Dai in a report.

BNP Paribas utilities analyst Daisy Zhang late last month downgraded her rating on the mainland’s power sector to “deteriorating”, citing “[profit] margin squeeze, declining return on equity, worse [plant] utilisation pressure and [higher stock] valuations compared to the last round of power oversupply in 1999-2000.”

Despite record profits last year, the mainland’s coal-fired power plants saw their average utilisation fall to a 37-year low of 4,239 hours - or 48.4 per cent - and is forecast by Fitch’s analysts to slide to between 3,600 and 4,000 hours this year and next year.

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Lower utilisation erodes profitability as more fixed costs, such as plant maintenance and depreciation, have to be borne by each unit of power sales.

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