China's Shandong hikes power fees as shortage looms

* Major Chinese industrial province boosts peak-hour power tariffs to forestall summer power shortage.

* Chinese power producers' shares briefly rally, but analysts say they won't benefit from new tariffs. (Adds details, analyst comments, share price movements)

By Rujun Shen

SHANGHAI, June 12 - China's Shandong province, a major heavy-industry hub, raised peak-hour power tariffs by about 13 percent for industrial users to forestall a summer electricity crunch, a surprise move that briefly sent shares in the country's top power producers such as Huaneng surging.

Analysts said the move should have little long-term impact on power producers' bottom lines but add to rising costs for metals smelters such as Aluminum Corp of China Ltd , while raising pressure on the province's round-the-clock manufacturers.

Some fear that other provinces may follow suit, ramping up costs nationwide at a time inflation is running high.

Hong Kong-listed shares in Shandong-based Huadian Energy Co soared 7 percent minutes after the news, while fellow power generator Huaneng Power International gained more than 3 percent. But by the close, both stocks had back-pedalled, with Huadian closing up 2 percent and Huaneng up 1 percent.

"Shandong was worried about power shortages in the summer peak consumption season," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University. "So it took a smart move."

FROZEN TARIFFS

State-set power tariffs have been frozen since June 2006, as Beijing worries that a hike may fuel inflation that jumped early this year to its highest in more than a decade. That capped earnings from power producers as the cost of coal mounted.

But analysts say Shandong's intent was less to aid struggling generators than to avert rolling summer brownouts. Coal inventories have become dangerously lows as power producers put off stocking up on the increasingly expensive hydrocarbon.

"Due to tight thermal coal supplies, our province is facing a power shortage this summer," according to the government website of Jinan, the provincial capital .

Affluent coastal Shandong, one of China's most populous provinces, raised peak-hour industrial tariffs to 170 percent of a base tariff from June 10, the government of Jinan said.

The tarriff during the newly designated "peak hours", from 10:30 a.m. to 11:30 a.m. and from 7 p.m. to 9 p.m., is 13 percent higher than the previous charge for those periods of 150 percent of the base.

Under the plan, the tariff for several hours in the morning and evening designated as "busy hours" has been raised to 160 percent of the base from 150 percent, the website said.

But during hours of slack demand, from 11:00 p.m. until 7:00 a.m., industry users need only pay 40 percent of the base tariff, down from 50 percent previously.

"It's bad news for aluminium and nickel pig iron producers. This will certainly force some nickel pig iron producers to shut down," Judy Zhu, commodity analyst at Standard Chartered, said.

"It's particularly hard for nickel pig iron producers to raise prices as the nickel market isn't doing well," she said.

China is also the biggest producer of nickel pig iron of which the bulk was produced in Shandong last year.

Furnaces at aluminium smelters' pots and nickel pig iron producers usually are required to run continuously, because of the high costs associated with restarting production.

GRID CHARGES

Executives said it was unclear how much Huadian or other generators could benefit, because the move affects only charges between grid operators and industry users, while Huadian continues to sell electricity to the grid firms at a government-set price.

"I can't see any direct benefit," said Huadian Board Secretary Zhou Lianqing. "But indirectly, raising tariffs during peak hours could boost electricity demand in lower-usage hours."

But with Beijing determined not to raise power tariffs anytime soon, other provinces may follow Shandong's lead.

In the longer term, some analysts believe Beijing will have to raise state-set power tariffs, partly to regulate power use in the world's largest electricity market after the United States and partly to ease the pain for its electricity generators.

Chinese coal prices have been surging in the past few months, squeezing margins for many generators.

Thermal coal shortages have emerged in parts of the country, with stock levels at key power generators in several provinces below the state-set warning level of seven days' use.

This month, the Shandong provincial government called on coal mines to increase supplies to power plants at lower prices.

"The new power tariff wouldn't have much influence on coal mines, especially since the Shandong government has already intervened in coal price," said Zhu. (Additional reporting by Polly Yam and Parvathy Ullatil; Editing by Edwin Chan and Sambit Mohanty)

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