Beijing considers merger to create $230bn energy group, say reports
Friction over coal contracts prompts talk of tie-up between Shenhua and Datang
Contract negotiations between Chinese coal group Shenhua and power generators have led to reports that Beijing will force the miner to merge with one of its largest electricity companies as rising prices create friction within China’s state-owned economy.
A merger of state-owned Shenhua with power group Datang would, if completed, result in a utility company with an estimated Rmb1.6tn ($232bn) in assets.
Shenhua, which earlier this month posted its first profit in four years, has threatened to cut coal supply if state-owned power plants do not agree to higher prices for the second quarter. Seven power generators in the coal-dominated province of Ningxia were so irate that they sent a letter to the regional government demanding that Shenhua should instead be forced to lower prices.
The proposed merger between Shenhua and Datang “creates a company that has no coal price risk”, said Laban Yu, analyst for Jefferies in Hong Kong. “As long as power prices are set at a level that covers the coal price then there is no change in revenues or profits.”
The State-owned Assets Supervision and Administration Commission, or Sasac, has a political mandate to merge China’s centrally owned companies and create internationally competitive champions. But many of the mergers have resulted in bloated behemoths that are, in the Chinese phrase, “big but not strong”. Some powerful state-owned companies, including oil groups Sinopec and PetroChina, have successfully fought Sasac’s efforts.
Hong Kong-listed shares in Datang Power closed up almost 7 per cent on Thursday following the reports in Chinese media. Datang said in a statement to the exchange that it had no information about a proposed deal. Shenhua’s Hong Kong-listed shares fell 1 per cent. Sasac has not confirmed the reports.
The dispute comes as coal prices recover from a four-year slump. An employee with the Huaneng power plant in Ningxia, another of the disputants, said on Thursday that the contract had not been signed. The Ningxia government was helping with negotiations, he said.
The Chinese power sector relies on government-brokered supply contracts with state-owned coal miners and, in return, generates power at government-set prices. The arrangement led to electricity shortages when the Chinese economy began to boom, opening the door to private investment in both power and coal. Soaring spot prices were kept aloft by the limited supply provided by state-owned miners under term contracts.
However, restrictions on loans to private miners and falling prices as economic growth has slowed in the past few years has reconsolidated much of the sector in state hands.
In the past two years, as coal prices slumped, Beijing ordered mines to reduce operating days in an effort to prop up returns for groups such as Shenhua. It also ordered power generators to source more of their coal supply through term contracts, in effect freezing the spot market. The output restrictions helped fuel a spike in the futures market beginning in August.