The greatest coal baron of all

In China, Shenhua is the king of this – but it wants much, much more

The mythical gods of ancient Greece were proud, powerful and prone to a feud or two. Take the case of the goddess Eris, who felt snubbed when she wasn’t invited to the wedding of Peleus and Thetis. So she provoked a row by throwing a golden apple into the wedding crowd, to be won by the prettiest goddess at the party.

Paris, Prince of Troy, got the thankless task of picking the winner (although the goddesses did strip off in pursuit of the prize) and his final decision (he chose Aphrodite) is said to have triggered the Trojan War.

There are some similarities between the feuding gods of Mount Olympus and China’s biggest state-owned enterprises. Many of these firms are also colossal in scale and look down haughtily on the mere mortals of the private sector world. Like the gods, they are jealous of their turf and sensitive to slights. And in spite of their sibling relationships, they are also prone to family feuding.

WiC was reminded of this comparison once more by the thrusting behaviour of Shenhua Group, a vast state-owned energy conglomerate. In recent weeks Shenhua has been making its presence felt with pushes into the oil and electricity sectors. And in both cases it is rubbing up against established players, similarly state-owned.

For instance, Shenhua – also China’s largest coal firm – has just opened its first petrol station. The site for the new venture is Erdos, a city in the coal-rich province of Inner Mongolia, and the location for a Shenhua coal-liquefaction plant with an annual production capacity of 1 million tonnes. This is being used to convert Shenhua’s plentiful coal stocks into petrol. But until recently Shenhua wholesaled its product to companies like Sinopec and PetroChina. By going into retail, and rejecting the offer of a long-term supply contract with PetroChina, Shenhua is targeting a cut of profits that can be made selling refined oil, reports CBN Weekly.

Of course, it is too early to tell whether Shenhua can scale up a fuel retail network that uses coal as its main source of supply. But it does show that the coal giant is scouting out the territory of its rivals. CBN calls the move – a coal firm selling petrol directly to drivers – “unprecedented”. The two oil majors control 80% of the petrol station business (Sinopec leads with 30,121 petrol stations).

Another example of Shenhua’s ambition came in recent dealings with State Grid Corporation of China, the country’s huge power network. Shenhua has signed a deal to acquire State Grid Energy Development, a firm with coal projects in a number of regions and assets worth Rmb55 billion ($8.69 billion) as of the end of 2011, reports China Coal Resource. The acquisition will put Shenhua’s thermal power capacity on a par with China Power Investment Corporation, one of China’s five power generation giants, reports the Shanghai Evening Post.

Companies that have tried to compete with State Grid in the past have rarely enjoyed the experience. The fact that Shenhua was able to scoop up a share of its assets is another sign of the coal company’s status in the SOE hierarchy. The transaction certainly surprised those who watch State Grid’s movements. Like a black hole, its default mechanism is to expand endlessly, meaning it is loath to sell assets (for more on this vast SOE, see our Talking Point in WiC108).

Shenhua is no shrinking violet itself. In 2011, it was among the five most profitable (non-bank) companies in China, reports Shanghai Evening Post. It eked out profits of Rmb44.82 billion.

Within the coal sector – currently struggling with oversupply and falling prices – Shenhua stands out. While the majority of the 38 listed coal producers reported declines in net profit in the first half of the year, Shenhua made profits of Rmb25.18 billion, a 14.7% increase, reports CBN Weekly.

But as CBN also points out, Shenhua’s strong performance in the first half was partly due to income tax breaks earned from its investments in the less developed western parts of the country. The newspaper thinks the results speak less to the health of the coal industry at large, where profitability has also been threatened by foreign coal imports (see WiC154).

“Because there is no market and no demand, resources prices are falling and inventory accumulating. A large number of small and medium-sized coal enterprises have seen losses, or have directly suspended or cut production,” is how an official at one coal mining company summed up the situation for website 100ppi.com.

Against this backdrop, perhaps it makes sense for Shenhua to strengthen its capabilities in non-core areas like power generation and oil production.

In the meantime, the company will seek to take full advantage of its industrial chain to maintain its position at the summit of the coal industry. Shenhua has some of the lowest production costs nationally. Among its other advantage? Owning nearly 1,400 kilometres of railroad – rendering it independent from the state-owned rail sector.

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