Fusing Coal and Power Sources

By+Wang+Jun

The State Council has approved the merger of China Guodian Corp. and Shenhua Group， according to a statement from the State-Owned Assets Supervision and Administration Commission （SASAC） of the State Council on August 28. The two companies， which are among the countrys largest power generators and coal producers respectively， will form the State Energy Investment Group Co. Ltd.

Listed subsidiaries from the two groups， GD Power Development Co. Ltd. and China Shenhua Energy Co. Ltd.， also announced the State Energy Investment Group Co. Ltd. as their parent company following the merger.

A new giant

After reorganization， the State Energy Investment Group Co. Ltd. will have total assets worth 1.8 trillion yuan （$275.65 billion）， surpassing China Huaneng Group， which is currently the countrys largest power generator.

The business sectors in which the State Energy Investment Group Co. Ltd. engages include coal mining and sales， conventional and new energy power generation， port and railway transportation， coal chemicals， fi nance， energy conservation and equipment manufacturing. As a result， the new company will be a world-leading energy group.

The merged company will become the controlling shareholder of Shenhua Energy and GD Power， cutting the number of stateowned enterprises （SOEs） directly under the SASAC to 98.

Since the two companies may face competition， Shenhua Energy and GD Power announced the establishment of a new joint venture with their respective assets and shareholders rights involving thermal power. Assets provided by GD Power are priced at 37.37 billion yuan （$5.72 billion）， and those provided by Shenhua Energy are priced at 29.27 billion yuan （$4.48 billion）. GD Power will be the controlling shareholder of the new joint venture， holding 56.08 percent of the shares.

Resources integration

Coal and thermal power industries are respectively on the upstream and downstream of the industrial chain， but there has been a large discrepancy in their profi ts for many years. Since 2016， coal prices have maintained growth， further intensifying the issue.

Thermal coal prices in China rose from 297 yuan （$45.48） per ton at the outset of 2016 to the current figure of 612.2 yuan（$93.75） per ton， with the performance of listed companies in the coal business improving signifi cantly.

According to figures from Wind Info， a financial information provider in China， all 20 listed companies in the coal mining and processing industry have reported growing profi ts over the same period last year in their semiannual reports. Among them， 10 reported 10-fold profit growth， and 18 saw their profi ts rise by 100 percent or more.

In contrast， thermal power generators that had performed well in previous years are now suffering a decline in profits due to growing costs. In the first quarter of this year， Chinas five major power companies lost money in their thermal power businesses， dragging down their overall profits； among the 38 power generators in China， 16 reported net losses in the first quarter， and 19 saw their net profits decline compared with a year ago， based on a report from the Securities Times.

As leaders in their respective industries， Shenhua Energy reported net profi t growth of 147.4 percent in the fi rst half of this year， while GD Power reported a net profi t decline of 53.83 percent in the same period.

The National Development and Reform Commission （NDRC） has held several meetings to coordinate coal supplies and prices since June， and 11 provinces and municipalities have raised electricity prices for the first time in the past five years， yet thermal power companies continue suffering losses.

Therefore， reorganization of coal and thermal power resources has become an urgent task for the Central Government.

In July， 16 ministries including the NDRC and the Ministry of Industry and Information Technology jointly issued a guideline on reducing overcapacity in the thermal power industry， which encourages reorganization of large power generating companies. It also encourages cooperation between coal and power enterprises on the upstream and downstream of the industrial chain in order to stabilize coal prices and supports integration of coal and thermal power resources through mergers and acquisitions， equity cooperation， asset replacement， and other means.

GD Power has claimed that the reorganization will be conducive to eliminating the discrepancy in profi ts between the coal and thermal power sectors. The transaction will also further enhance cooperation between coal and power enterprises in the medium and long term， stabilize prices in the coal market and reorganize quality resources from both sides. This will be of great signifi -cance against the background of supply-side reform in the thermal power sector.

Li Jin， deputy head of the China Enterprise Reform and Development Society， said that the reorganization of Shenhua and Guodian is of signifi cance in two aspects. First， it will improve industrial concentration of the power sector， which will help alleviate difficulties Guodian is facing now. At present， 12 central SOEs directly under the SASAC have power generating qualifi cations. Compared with the steel industry， the power sector has a lower level of industrial concentration.

“But more importantly， this is the fi rst attempt at reorganization that crosses different industries and integrates resources. Such a reorganization pattern will not only be a case to be duplicated in the thermal power industry， but also provide more possibilities for the reorganization of the whole power industry，”said Li. “In the future， the hydropower and nuclear power industries can also learn from this example.”