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Friday, 13 November 15
WEAK CHINA POWER DEMAND DAMPENS COAL CONSUMPTION - FITCH
Fitch Rating BThe weak growth in China's electricity consumption in 2015, together with increasing non-thermal power generation capacity are exerting more pressure on the thermal coal market, which is already suffering from over capacity, says Fitch Ratings.

Fitch Ratings further says, overcapacity looms in China's power generation industry, with coal-fired power at most risk. China is experiencing the slowest power consumption growth in three decades - power consumption only increased 0.8% yoy during 9M15, largely due to a 0.9% yoy drop in industrial demand that accounts for 70% of overall power usage. Despite weak electricity demand, generation capacity increased by 9.4% yoy in the same period, of which half came from renewable and nuclear generation sources. Coal-fired power supply contracted 2.2% yoy during 9M15. China's total coal consumption in 9M15 was 2.9bn metric tonnes (MT), down 4.6% from the same period last year.

Consumption of coal-fired power is unlikely to increase significantly in the next 12 to 18 months, given our expectation of weaker economic growth in China, as well as the overall reduction in the energy intensity of the Chinese economy.

Furthermore, "we expect significant addition of renewable-energy generation capacity in the medium term, which is likely to further depress utilisation levels of coal-fired power plants in the absence of a substantial pick up in the energy-intensive industries. Some 177GWs of new generation capacity was under construction as of September 2015, or 13% of 2014 total installed capacity; clean energy sources account for just over 50% of this additional capacity.", says Fitch.

China's key thermal coal reference price, the Qinhuangdao 5,500-kilocalorie power coal price, has fallen 30% to CNY360/MT at end-October 2015, from CNY515/MT at the beginning of 2015. Prices have continued to be under pressure despite imports falling 29.8% yoy to 156m MT in 9M15, and domestic production falling 4.3% yoy to 2.7bn MT in 9M15 following production cuts, including cuts by large operators such as China Shenhua Energy Company Limited (A+/Stable) and China Coal Energy Company
Limited.  

"We expect sustained low coal prices and the limited potential for further cost cuts to lead to more mine closures, which will bring some balance to the market over the medium-term. This may also lead to some consolidation in the highly fragmented coal mining industry in China, with large players increasing their market share - this is more likely to happen via stronger players sustaining or increasing their production as the weak leave the market, than by strong players acquiring distressed assets."Fitch Concluded.


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