China Shenhua Energy Company-key details from, 2006 interim results apply titled “coal supply-side reform”

China Shenhua Energy Company (Shenhua) provides enormous detail on the status of the Chinese coal and electricity sectors, plus its expectations looking forward. Several key items we see as newsworthy are:

• Shenhua was profitable in the six months to June 2016 (1HCY2016), but the return on assets was just 2.6% (vs 3.1% in 1HCY2015). Total revenues were 13% yoy, and net profit was down 19% yoy.
• The coal price has been falling in the seaborne market, but also in domestic Chinese markets for the last five years. In the six months to June 2016 the domestic Chinese thermal coal price was again down 14.5% year-on-year.
• This collapsing fuel cost has meant the profitability of Chinese coal-fired power plants was at record highs in the six months to December 2015, notwithstanding collapsing utilisation rates.
• The 2015 result was a record high 70GW of new coal-fired power plant build.
• The Central China government has repeatedly taken action to curtail stranded-asset build by banning new coal fired power plants and cutting the price of coal fired electricity at the start of 2016. Coal fired power wholesale tariffs fell 11.2% yoy in the June 2016 half to Rmb301/kWh (US$45/MWh).
• The stranded asset risk in China’s coal fired power plants are a major financial risk, on top of the financial distress of much of the Chinese coal mining sector at a time the government is closing 500Mt of coal mine capacity and retrenching 1.2 million coal mine workers.
• Shenhua reports the average Chinese coal fired power plant operated for just 2,031 hours in 1HCY2016, a record low utilisation rate of just 46.4% (down from 49.4% in CY2015). Shenhua expects this to get worse in 2HCY2016 and this highlights the massive overcapacity dilemma of the Chinese economy.
• The Chinese government has mandated its successful energy and resource stateowned enterprises (SOE) become more internationally focused. Shenhua is following this mandate and is expanding in Mongolia (coal mining), the U.S. (gas development), Australia (via its Watermark coal mine proposal) and Indonesia (coal mining and 2.6GW of coal-fired power plant development). The 1HCY2016 report highlights that Indonesia is the priority, given massive overcapacity in coal, and Watermark is barely mentioned.
• Shenhua’s coal exports rose +117% yoy in 1HCY2016, but remain immaterial at 1.3Mt or 0.7% of total coal volumes of 186Mt. Shenhua’s EBIT cost of coal averaged just Rmb104 (-10.8% yoy) or US$16/t (FOR). Given this, a current thermal coal price of US$68/t looks very attractive for China to lift exports.

Press release: Shenhua Coal Slowdown Signals a Broader Trend in China

Please view full report PDF for references and sources.