CPID enjoyed unexpectedly larger fuel cost drop

Thanks to coal pricing mechanism breakthrough.

For the past two years, China Power International’s (CPID) unit fuel cost drop was relatively lower than at peers, given most of its coal-fired power plants are mine-mouth, where the coal price was relatively low but stable (i.e. less volatile than the seaborne coal).

According to a research note from Nomura, however, with the continuous oversupply situation for the domestic thermal coal market resulting in weak coal prices, CPID managed to establish a new coal pricing mechanism with the coal suppliers.

In this, the price of the mine-mouth coal is now linked to the Bohai-Rim Steam Coal Price Index (BSPI).

Here’s more from Nomura:

As such, CPID could benefit from a 22% drop in the spot coal price YTD, resulted in a 14.7% y-y unit fuel cost drop in 1H14.

Accordingly, the company also revised its 2014F full-year guidance, from a 5% unit fuel cost drop previously to the current guidance of a 13-14% y-y drop.

We do not see the current guidance to be aggressive, given that the 1H14 unit fuel cost was lower than the 2013 average by 12.5%.

Currently in our model, we assume a 13.9% unit fuel cost drop in 2014F, in line with management’s guidance.