China Shen­hua En­ergy: for the birds

Financial Times Middle East - - Lex -

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.

Newspapers in English

Newspapers from Saudi Arabia

© PressReader. All rights reserved.