Hongqiao Shares Plummet To Two-Year Lows After Fees On Captive Power Plants Announced By Shandong Government

Hongqiao Shares Plummet To Two-Year Lows After Fees On Captive Power Plants Announced By Shandong Government

Shares of the world’s most prolific aluminium producer dove for the second straight day on Monday after its home province debuted a new fee schedule for captive power plants.

China Hongqiao Group Limited watched its shares plummet by 8.5 percent yesterday, bottoming out at a two-year nadir of HK$5.30 (US$0.675). The slide followed a fall of almost 16 percent on Friday.

Hongqiao’s losses were triggered by an announcement by the Shandong commodity price bureau that owners of captive power plants would be assessed a tax of ¥0.05 (US$0.0073) per kilowatt hour (kWh) of electricity generated as of July, increasing to ¥0.1016 (US$0.0148) per kWh at the beginning of next year.

The move is meant to dissuade the use of captive energy plants, as such plants, which are almost universally coal fired, contribute to the country’s serious air quality issues. The province is the first to establish such fees after the July declaration by the National Development and Reform Commission that plants that operate on-site power generation operations would pitch in to offset US$12 billion in cuts to industrial and commercial electrical prices.

According to Argonaut Securities (Asia) Ltd analyst Helen Lau, the move will increase aluminium production costs in the province by ¥500 (US$72.91) per metric ton in the first year and a half alone. She indicated that average industry production costs at present per metric ton of aluminium at ¥14,500 (US$2,114.42)

“The unit profit (for Chinese smelters) may be 200 or 300 yuan per tonne,” she explained. “If this cost increased by 500 yuan per tonne, their profit will be wiped out.”

Extrapolated across Hongqiao’s entire operation, an increase in production costs of ¥500 per metric ton on the firm’s yearly production total of 6.46 million metric tons will add a cost of ¥3 billion (US$438 million) per year. Such a cost will be a burden indeed, considering the firm’s profits of ¥1.8 billion (US$263 million) in the first half of this year.

For its part, Honqiao said in an announcement posted to the Hong Kong Stock Exchange that the new fees will hamper the cost advantage of the firm’s “power plants to some extent but will not have a fundamental impact on the core competitive advantages of the Group.”