China Shenhua Energy: for the birds
A healthy canary meant a healthy mine in the old days. Strong 2016 results from China Shenhua Energy might equally suggest the country’s coal industry is in good shape. The largestlisted coal supplier by sales registered its first net profit growth in four years.
Yesterday, the shares rose as much as 20 per cent on news of a special dividend. The euphoria may not last.
As with many industrial groups, Shenhua’s recovery has been state led. Last year, in order to improve coal prices and lighten debt servicing burdens on producers, regulators restricted production. The measure was successful — too much so, in fact.
From first-half lows, coal prices nearly doubled to November highs. Fretting over soaring prices and potential winter shortages, regulators relaxed output curbs. Prices eased until reports of new restrictions last month.
This flip-flopping is typical of China’s government and reflects prevailing policy skews. Higher prices may appear good for ailing coal miners but they do not function in isolation. The knock-on effects for energy supply and pricing are politically awkward.
In any event, the supply side tinkering is insufficient to support coal prices in the long run. Fitch Ratings notes that in the first eight months of 2016, 152m tonnes of excess coal capacity were cut, compared with 800m tonnes under construction and 600m tonnes seeking approval.
Carbon Tracker Initiative says the demand outlook is no healthier. Utilisation of coal-fired energy capacity is only 50 per cent. Planned capacity increases of three-quarters do not bode well as consumption growth slows from 10 per cent to 3 per cent a year. More efficient generation from existing plants and increases in other sources of power add to the woe.
Shenhua’s shares may look cheap at 12 times 2018 forecast earnings. But this is pricey versus a five-year average of 9 times. That canary may be chirping merrily now. Expect it to develop a nasty cough later on.