Coal uptick does little to alter downbeat long-term outlook

China's coal power generation has rebounded over 2016 and early 2017, after having registered a 3.2% contraction over 2015. The increase in coal power generation stems in large part from a ramp-up in power demand from China's heavy industry sectors , which received fiscal support from the Chinese government in an attempt to prop up economic growth in the country. As coal remains the dominant fuel of China's electricity sector in terms of responding to demand surges - the sector was instrumental in meeting the 5% and 6 .7% increases in power consumption growth in 2016 and 1Q17 respectively.

Near-term rebound will not offset coal's declining importance

BMI do not see scope for these robust growth rates in coal power generation to be maintained over the coming years. The government's strong commitment to curbing coal us e, combined with s lowing consumption and growth in other power generation segments will ensure that coal's relative importance in China falls over the coming decade. We forecast growth in coal generation to average 0 .6% per annum between 2018 and 2026 - much slower than the 3.1% equivalent we forecast for the power sector as a whole. This dynamic will erode coal's share in the power mix from 6 5% in 2017 to 52% in 2026.

There are a number of factors underpinning our relatively downbeat outlook for coal-fired power in China.

Government pollution reduction policy to ensure coal power decline

The substantial pollution stemming from coal mining and coal generation in the country is the main reason why we expect the importance of coal power to erode over the long er term. In fact, reducing domes tic pollution and lowering emissions from the coal segment is a key priority of the government under China's 13 Five-Year Plan (see '13 Five-Year Plan: Cementing China's Power Mix Transition', 24 March 2016). The commitment to this strategy escalated over 2016, as the government imposed cuts to coal-fired electricity tariffs, shut down and halted the construction of coal-fired power facilities and triggered aggressive consolidation in the mining sector - in order to restrict production.

However, the government's coal-curbing plans hit headwinds as the fiscal stimulus resulted in an up-tick in power demand and, by extension, a surge in coal demand from the power sector. The supply crunch resulted in escalating input costs for coal power utilities and an erosion of profit margins for coal plant operators (see 'Tough Times Ahead For Coal-Power Utilities', 5 April). Eventually this led the government easing restrictions on coal miners.

While this was a temporary set-back to efforts to curb coal sector emissions , we believe it was only indicative of coal's current elevated importance in meeting power demand surges. As such, we do expect the government to remain committed to reducing pollution through the reduction of coal consumption (see 'Government Coal-Curbing Policies To Register Success', 8 November 2016). As such, project cancellations will remain the norm in the sector and inefficient facilities will be s hut down. For example, a number of planned projects were shelved in 2016 and early 2017 during periods when the coal power sector rebounded.

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