Bloomberg quoted JPMorgan Chase & Co said China order to halt domestic coal price increases signals the government may hold off on raising electricity rates until later this year when inflation expectations become clearer.
Ms Jing Ulrich chairwoman for China equities and commodities said further intervention in prices isn’t expected because inflation may moderate starting in July or August.
She said “This effort to contain coal prices provides a near-term alternative to hiking electricity prices at a time when policy makers do not want to see inflationary pressures increase. The government may take further action on electricity pricing later this year when there is more clarity on the full-year CPI growth.”
She added that more than 40% of power producers operated at a loss between January and May.
Ms Ulrich said the move has affected sentiment on future margins of Chinese coal companies, even though they continue to make good profits at current price levels. She said that under a current pricing system, the government should increase power tariffs to absorb 70% of the gains in costs to electricity generators when the average spot coal price rises by more than 5% over a six-month period.
Ms Ulrich said China balance of coal supply and demand should improve in the second half of the year as electricity consumption growth slows and a major inland railway used for transporting coal restores operations after maintenance.
She said production of energy-intensive materials including aluminum and steel are showing early signs of slowing caused by government measures to limit electricity discounts and the removal of some steel export subsidies.
She added that lesser reliance on coal fired power plants during the summer rainy season also lowered demand for the fuel, Ulrich said. Hydropower accounted for 16.4% of total electricity production in May compared with 12.5% in April.
Ms Ulrich said on the supply side, maintenance of the Daqin railway was completed in May, leading to higher coal inventories at power plants before the peak summer demand season. Stockpiles at major power plants rose to 18 days of use as of June 20th compared with 15 days at end March.
(Sourced from Bloomberg)
