Power Utilities Erase Gains After China Raises Electricity Rates

Chinese power producers led by Huaneng Power International Inc. (902) fell in Hong Kong after some investors deemed an early rally triggered by an increase in electricity prices and a cap on coal costs as excessive.

The unit of China’s largest power producer closed 2.5 percent lower at HK$3.85, after climbing as much as 4.8 percent. Datang International Power Generation Co. (991) fell 1.2 percent to HK$2.54 after gaining as much as 7.8 percent. Huadian Power International Co. (1071) dropped 0.7 percent to HK$1.40. The benchmark Hang Seng Index (HSI) gained 5.6 percent.

China raised prices charged by coal-fired power plants to distributors, known as on-grid tariffs, by 0.026 yuan (0.41 cent) per kilowatt-hour effective today, and capped the cost of coal in the spot market at 800 yuan a ton, below current prices. Huaneng and Datang posted declines in third-quarter profit while Huadian reported a loss, following increases in fuel prices.

“The tariff hike announcement might trigger some profit- taking,” Citigroup analysts Pierre Lau, Charles Wang and Cathy Chan wrote in a report. “But we maintain our positive view on them in the first half for margin improvement from the hike and easing of spot coal prices.”

The government also raised retail power prices by an average 0.03 yuan per kilowatt-hour. Inflation slowed the most in almost three years in October, giving China room to increase tariffs. The government last raised power prices June 1.

China will also limit price gains for thermal-coal supply contracts next year to less than 5 percent, the National Development and Reform Commission, the country’s top economic planner, said yesterday. The government froze this year’s contract prices at 2010 levels to tame inflation.

Coal Producers

China Shenhua Energy Co. (1088), the nation’s biggest coal producer, gained 6.1 percent to HK$34.65, the most since Oct. 7. China Coal Energy Co., a unit of the second-largest producer of the fuel, climbed 8.7 percent to HK$9.51. Yanzhou Coal Mining Co. (1171) rose 9.3 percent to HK$19.

“Raising the contract price will provide major coal producers an immediate boost in terms of guaranteed profit margins,” said Helen Lau, a Hong Kong-based analyst at UOB-Kay Hian Ltd. “The overall optimistic sentiment in the market today certainly also helps the performance of coal stocks.”

Shenhua sold 45 percent of its coal under contracts in the first nine months, and with a 5 percent increase in prices, profit may increase an additional 3.5 percent for 2012 on top of estimates, Lau said. China Coal, which sold 56 percent of its coal under contracts, may get an extra 8.3 percent boost to its net income, she said.

The government capped contract prices at 570 yuan a ton this year, according to Lau.

Benchmark spot prices at Qinhuangdao, the nation’s largest coal port, rose to 860 yuan a ton Oct. 23, the highest since 2008.

To contact the reporter on this story: Guo Aibing in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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