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Tue, Feb 01, 2005 - Page 12 News List

Foreign power firms leaving China

UNPROFITABLE In light of fixed electricity tariffs and skyrocketing coal prices, many foreign companies say they are pulling out because they are losing money


China's booming economy has led to a major energy shortage but foreign power companies are pulling out because they cannot make enough money, industry managers and analysts said yesterday.

After investing heavily in the sector during the early 1990s, foreign power companies hit mainly by rising coal prices but fixed electricity tariffs have been finding China a losing proposition.

"It's a complete disaster. In 2004 coal prices skyrocketed along with other commodities in China and we got no tariff increase," said Robert Peterson, chief executive of Power Peak, which operates plants with total capacity of 400 megawatts.

"You can't make money in China's power sector," Peterson said.

Partially to blame is the fact that the country's five state-owned power groups are protected by state-allocated prices that allow them to buy coal much more cheaply.

Foreign firms have to buy coal on the spot market where prices are much higher.

"Surging coal prices are pressuring power plants' profits," said Luo Ming, a power industry analyst with Changsheng Fund Management.

"Foreign firms will continue to face the problem for the next two years. Now is the right time to pull out of China," Luo said.

Although Beijing raised electricity tariffs in January and June last year, the rise could not offset surging coal prices, up 36.8 percent year-on-year in the first nine months of last year.

A series of broken contracts by local firms was also to blame for the sharp fall in foreign fixed asset investment in China's power industry, forcing firms to slowly withdraw support over the last seven years, analysts said.

"A lot of companies entered the Asian and Chinese markets in the beginning of the 90s but had to pull out after 1997 as local contracts were not honored. A lot of firms' investment returns did not meet expectations," said Gary Lau, senior vice president of Moody's Corporate Finance Group.

In the early 1990s as China's economy began to take off, local power operators in need of funds also teamed up with foreign firms to build power plants which guaranteed their partners a high investment return. These build-operate-transfer (BOT) agreements were also coming to an end.

"Foreign firms must transfer their stakes to the Chinese side once the contract is over. This was why Siemens sold its stake in Hanfeng earlier this month," Luo said, referring to the German conglomerate that sold off its 40 percent investment along with Sweden's Vattenfall.

Despite the sector's rapid growth, foreign investment is unlikely to pick up in the near future as long as the price of coal remains high and while electricity prices are kept artificially low.

"Electricity tariffs are a political issue. If they rise too much, the population will not be able to pay," Moody's Lau said.

Even though the National Development and Reform Commission, China's top economic planning organ, last year pegged electricity prices to fluctuations in coal prices to help ease margin pressure for producers, doubts remain.

Analysts called into question the rules, set to go into effect this May, which are meant to transfer up to 70 percent of the increases in coal prices to consumers.

Lau said the new rules are seen only as guidelines that provincial governments can interpret as they see fit.

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