Fitch Ratings has commented that China's power consumption growth is likely to remain weak for 2009, although it expects the Chinese Independent Power Producers' (IPPs) profits and operating cash flows to benefit from the lower coal costs.

"China's electricity consumption fell 4% during Q109 due to weak demand from energy-intensive industries, extending the decline which started in October 2008," notes Simon Wong, Director in Fitch's Asia-Pacific energy and utilities team. "The reduction in industrial production and fall-off in export demand caused by the global economic recession is likely to lead to lower average utilisation and declines in revenues for coal-fired IPPs. However, Fitch anticipates that lower coal costs will more than compensate, and that the IPPs' 2009 financial results will be stronger than 2008," adds Mr. Wong.

Electricity consumption by industrial users, which accounts for over 70% of the nation's electricity usage, fell 7.85% in Q109 broadly in-line with the sliding value-added industry output indicator. Fitch forecasts real GDP growth will slow to 5.6% in 2009, the lowest growth rate since 1990.

Chinese domestic thermal benchmark coal prices have fallen by an average of 40% from their peak in July 2008 and have largely remained flat during the winter period. The surge in thermal coal spot prices during 2008 and the inadequate on-grid tariff adjustments implemented in H208 also resulted in numerous listed power producers recording their first losses since listing.

Fitch notes the annual coal contract negotiations between coal-fired power producers and coal mining companies have been in a stalemate since December 2008. The power producers are seeking cost reductions based on the fall in the spot price of coal and the fact that their tariffs were insufficient to recover all of 2008's coal costs. However, Fitch believes that upward tariff adjustments are unlikely in view of the reduced electricity demand and lower coal spot prices. Meanwhile, many IPPs have signed long-term coal supply contracts with Indonesian, Australian and Russian coal producers and some have invested in domestic coal mines to reduce their dependence on domestic coal contracts.

Despite the expected improvement in the IPPs' operating results in 2009, their stand-alone credit ratings continue to be under pressure from high leverage and poor liquidity resulting from historical aggressive debt-funded capex programmes, as well as the poor operating results reported in 2008. Fitch expects the current high leverage levels will limit the IPPs' capex programmes in 2009.

During the recent annual session of the National People's Congress, the Chinese Premier Wen Jiabao highlighted the need "to reform power pricing and gradually improve the system for determining tariffs, distributing and selling power". Timely power pricing reform which addresses the current imbalance between market-priced coal and capped tariffs should improve the IPPs' revenue risks, although capex, operational and acquisition risks remain.