Utilities In China Rattled By China’s Latest Arranged Match

A global powerhouse worth $280 billion on China’s Valentine’s Day was created by matching the country’s top coal miner with one of its biggest utilities as Beijing announced its latest arranged marriage.

But the union may spark jealousy elsewhere even as couples across the country celebrated the Qixi Festival. A bigger rival with an outsized role in the market would be faced and just months ahead of winter, other power companies fear they will lose critical thermal coal supplies.

Announcement of the deal to combine the nation’s largest coal miner Shenhua Group Corp Ltd with one of its biggest utilities China Guodian Corp was made by China’s State-owned Assets Supervision and Administration Commission (SASAC) in a statement after a months-long courtship.

With around 225 gigawatts of capacity and the largest global power company, the new entity will eclipse EDF and Enel. And as Beijing aims to streamline China’s indebted and inefficient state sector, the deal is also expected to spur more dealmaking across the power sector.

The spectre of losing a major supplier has stirred worries for smaller utilities in the world’s top consumer of the fuel, many of whom buy coal from Shenhua.

“We are very concerned whether they will give us enough supply for winter,” said a coal buyer for China Resources Power Group Holding Co Ltd (0836.HK), a top power company headquartered in Beijing.

8 percent of the 3.64 billion tonnes of coal China produced last year was accounted for by Shenhua. It was more than double what second-largest miner Shanxi Coking Coal Group Ltd produced, even though it was a small portion of the total,

In the upcoming winter, demand for heating is expected to surge in the country’s cold northern regions and the buyer for China Resources said his company is meeting a Shenhua executive next week to discuss terms and volume for that period.

“We don’t know where the renegotiation will head, but Shenhua will definitely give Guodian a priority for winter supply,” the buyer said.

As government-enforced mining capacity cuts as part of Beijing’s war on smog have helped fuel a spectacular rally utilities’ margins have been squeezed hard over the past year.

And an industry which many experts had said was in terminal decline was revived as those prices boosted miners’ earnings. in the first half of this year, one of the most profitable public commodity companies was Shenhua.

However, for exporters like Australia and Russia, any shake-up could be good news. It could spur demand for Chinese coal imports.

However, noting that power companies typically have diversified sources of supply, some sources downplayed any long-term impact.

This winter, more than ever before, utilities are more alert to potential supply constrictions. After forcing mines to slash output, tightening supplies and triggering a historic price rally, the government had to scramble to avert a winter power crisis last year.

Because smaller, inland utilities lack the financial clout to pay more to source from further afield, they may have “difficulties finding new suppliers” if Shenhua reduces how much it sells to third parties, a source at a major utility said.

“In the short term, it might grow tight in some regions due to the merger,” he said, although his company doesn’t buy much coal from Shenhua.

(Adapted from Reuters)


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