Power of love: China's
latest arranged match rattles utilities
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[August 29, 2017]
By Meng Meng and Josephine Mason
BEIJING (Reuters) - Beijing announced its
latest arranged marriage by matching the country's top coal miner with
one of its biggest utilities to create a global powerhouse worth $280
billion on China's Valentine's Day.
But even as couples across the country celebrated the Qixi Festival, the
union may spark jealousy elsewhere. Other power companies fear they will
lose critical thermal coal supplies just months ahead of winter and face
a bigger rival with an outsized role in the market.
After a months-long courtship, China's State-owned Assets Supervision
and Administration Commission (SASAC) announced the deal to combine the
nation's largest coal miner Shenhua Group Corp Ltd [SHGRP.UL] with one
of its biggest utilities China Guodian Corp [CNGUO.UL] in a statement on
The new entity will eclipse EDF <EDF.PA> and Enel <ENEI.MI> to become
the biggest global power company with around 225 gigawatts of capacity.
The deal is also expected to spur more dealmaking across the power
sector, as Beijing aims to streamline China's indebted and inefficient
For smaller utilities in the world's top consumer of the fuel, many of
whom buy coal from Shenhua, the spectre of losing a major supplier has
"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.
Shenhua accounted for 8 percent of the 3.64 billion tonnes of coal China
produced last year. While a small portion of the total, it was more than
double what second-largest miner Shanxi Coking Coal Group Ltd [SHANXA.UL]
The buyer for China Resources said his company is meeting a Shenhua
executive next week to discuss terms and volume for the upcoming winter,
when demand for heating is expected to surge in the country's cold
"We don't know where the renegotiation will head, but Shenhua will
definitely give Guodian a priority for winter supply," the buyer said.
Utilities' margins have been squeezed hard over the past year as
government-enforced mining capacity cuts as part of Beijing's war on
smog have helped fuel a spectacular rally.
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A company logo of China Shenhua Energy Co Ltd is displayed at a news
conference in Hong Kong, China March 16, 2010. REUTERS/Bobby
Those prices have boosted miners' earnings, reviving an industry which many
experts had said was in terminal decline. Shenhua was one of the most profitable
public commodity companies in the first half of this year.
Any shake-up could be good news for exporters like Australia and Russia,
spurring demand for Chinese coal imports.
Shenhua and Guodian did not return calls seeking comment.
IT'S COLD OUTSIDE
Some sources downplayed any long-term impact, noting power companies typically
have diversified sources of supply.
Utilities are more alert to potential supply constrictions this winter than ever
before. Last year, the government had to scramble to avert a winter power crisis
after forcing mines to slash output, tightening supplies and triggering a
historic price rally.
If Shenhua reduces how much it sells to third parties, a source at a major
utility said, smaller, inland utilities may have "difficulties finding new
suppliers" because they lack the financial clout to pay more to source from
"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.
Given the size of Shenhau's coal output, the prospect of competing for supplies
will likely spark further consolidation in the power sector, said Frank Yu,
principal consultant for Asia-Pacific Power and Renewables at Wood Mackenzie.
"Other power generators will naturally worry about playing on an uneven ground
with biased coal supply terms. That concern will facilitate other win-win
mergers as countermeasures," he said on Tuesday.
That's in line with Beijing's broader plan to reform the energy sector, removing
the conflicts between coal miners and power generators, he said.
(Reporting by Meng Meng and Josephine Mason; Editing by Tom Hogue
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