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Power Drain

Nearing bankruptcy, Anderson was introduced to Alliant, a utility that provides power in parts of Iowa, Illinois, Minnesota and Wisconsin and has annual revenue of about $3 billion. Alliant was looking for ways to expand its investments abroad.

In December 1997, Anderson flew to Cedar Rapids, Iowa, to make a presentation to Alliant's board. He was then in danger of losing one of his deals, a $20 million investment in a plant whose managers were talking to another investor. He told Alliant it was now or never. Less than two weeks later, Alliant wired an initial $700,000 into the joint venture account in Singapore. The following March, Alliant increased its stake to $40 million.

Most Chinese power plants, like this one in Daqing, burn coal, and most lose money. (Doug Kanter -- Bloomberg News)

At the time, Anderson said, neither he nor Alliant worried about a spike in coal prices. "The big question was, 'Can I sell what I produce?' " he said.

Peak Pacific now operates seven plants in China. Anderson guards the details closely, but he says his company reached $100 million in annual revenue by 2003 and was booking handsome profit. Last year, everything changed.

Electricity consumption surged 15 percent as new factories opened, particularly in power-intensive industries such as steel and auto construction. Roughly 90 percent of China's electrical plants run on coal. The extra demand overwhelmed mines and sent the price of coal soaring by more than half last year.

For Peak Pacific, the cost of coal once accounted for about half the company's cost of generating electricity. Now, it's about 70 percent.

Over the past two years, many unprofitable and unsafe mines have been closed, exacerbating the tight supply. Mines once surrounded the power plant Peak owns in Tangshan in Hebei province, where coal sold for about $30 a ton in January 2003. Now those mines are gone. By last December, Peak was railing in coal from neighboring Shanxi province, paying $56 a ton.

Anderson was right about the demand for electricity. But he was wrong about his ability to recoup increased costs, and wrong about the protective function of his relationships with officials: Provincial authorities shot down his formal filings for higher rates.

"We are facing some severe cost squeeze," Anderson said, adding that the company remains profitable, though margins have dropped. "It's difficult to persuade Alliant to continue to invest in China at this rate of return."

The coal spike has ravaged much of China's power industry, with 85 percent of the country's plants now losing money, according to the official China Daily. A new crop of foreign investors now scours China for power plants at distressed prices.

In much of the rest of the world, including the United States, what Peak and other power producers are experiencing would have been moderated by long-term contracts that lock in a fixed price for coal over years. But in China, long-term deals are almost unknown. Entrepreneurs disdain them as a limit on their upside.

Larger plants are getting some relief. Despite the official liberalization of coal prices, the central government brokers deals between major state mines and large, state-owned power producers that ensure that electrical plants can buy about half their fuel at less than market prices, said Hu Zhaoguang, chief economist at the State Power Economic Research Center in Beijing. That channel is closed to smaller companies such as Peak. They must rely on the spot market for coal, the most expensive option when supply is tight.

Anderson is now trying to persuade China's regulators to allow power producers to raise prices when fuel costs rise. In December, Beijing said such a policy was in the works. But analysts doubt it will happen soon. Such a move requires a complex balancing of interests among big state mines, electrical producers, companies that operate the transmission grid and local governments that buy power. Beijing fears that higher electrical prices would upset households and industry while exacerbating inflation.

"There will be major delays in implementation," said Scott Roberts, an analyst at Cambridge Energy Research Associates in Beijing.

Even if power producers are able to raise prices, an enormous wave of competition is in the offing as China becomes swamped with new plants. According to the government, about 280 gigawatts of electrical capacity is under construction. That amounts to nearly four times what Britain built over an entire century and an increase of nearly two-thirds over the existing supply.

The central government has designs on limiting the growth of electrical capacity, fearing inflation in raw materials needed to build the plants in the short term and a disastrous power glut that would waste capital in the long term. But much of the new investment is backed by local governments with their own designs: They can extract a cut from development projects.

Nearly half the new plants lack required central government approval. Peak and other independent producers are lobbying the government to shut down illegal projects lest they suffer what has become a familiar China fate: too much investment producing too many goods, sending prices so low that no one can profit.

But local governments are likely to shield projects to protect their own stakes. Moreover, many of the plants are financed by bank loans that would go bad if the projects were scrapped, worsening a toll of bad debt estimated at $500 billion.

"They can't shut a lot of it down," Roberts said. "The train's left the station."

All of which forces Anderson to take the long view.

"It's going to have a good ending," he said. "This is chapter four or five in a 20-chapter book."

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