China may delay electricity price increase to later this year

JP Morgan

China's 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, JPMorgan Chase & Co said today.

Further intervention in prices isn't expected because inflation may moderate starting in July or August, Jing Ulrich, chairwoman for China equities and commodities, said in an e- mailed note.

Consumer prices in China rose at the quickest pace in 19 months in May, prompting the government to find ways to fight inflation.

The government ordered coal companies to refrain from initiating spot price increases and forbade them from amending prices agreed on in their annual supply contracts with power producers, according to a statement on June 25. [Coal firms asked to keep coal prices from rising]

"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," Ulrich said. "The government may take further action on electricity pricing later this year, when there is more clarity on the full-year CPI growth."

More than 40 percent of power producers operated at a loss between January and May, she said. The benchmark contract price signed between power producers and China Shenhua Energy Co, China's biggest coal supplier, for 5,500 kilocalories coal is about 570 yuan ($84) per metric ton, according to the note. Spot prices are at about 755 yuan per ton.

Future margins

The move has affected sentiment on future margins of Chinese coal companies, even though they "continue to make good profits at current price levels," Ulrich said.