BMI View : We have moderated our short-term outlook for the Asian power sector this quarter on the back of continuing economic and currency weakness in India as well as idiosyncratic risks in Taiwan. The structural weaknesses in both countries are also likely to extend beyond 2014 and act as a drag on electricity consumption over the medium- to long-term. That said, we note that the regional fundamentals for the Asian power sector remain extremely strong.
We have moderated our short-term outlook for the Asian power sector this quarter, and are now forecasting electricity generation in the region to grow by 6.1% in 2014 (down from 6.2% previously). This moderation was prompted by continuing economic and currency weakness in several countries, most notably India and Taiwan. This is because a slowdown in economic growth or industrial output would negatively impact electricity consumption and generation.
India: Higher Fuel Costs Prompt Downgrade
We had downgraded our 2013 and 2014 growth projections for the Indian economy and power sector in April, and the recent collapse in the Indian rupee reinforces our conviction that the country is unlikely to enjoy a forceful economic bounce in the coming quarters. The rupee has fallen by about 12% against the greenback to current levels from its highs in early May, due mainly to the country's sizable current account shortfall and the considerable amount of foreign financing the country needs in order to fund such a deficit ( see 'Cyclical Bounce Capped By Lingering Twin Deficits', April 5). This validates our view that investment and industrial production would remain weak and act as a drag on electricity consumption growth.
This quarter, we have further revised down our short-term forecasts for the Indian power sector on the back of the weak rupee. This is because the collapse of the rupee will exacerbate fuel import costs and worsen existing fuel shortages, affecting electricity generation. The Indian power sector remains highly reliant on coal and gas imports for as exploitation of domestic resources continues to be hindered by production and regulatory issues. Domestic natural gas supplies have dropped because of production issues at Reliance Industries offshore gas field, while coal supplies are extremely tight as state-run monopoly coal supplier Coal India has been struggling to boost capacity due to regulatory and production problems.
| Weaker INR To Affect Fuel Imports |
|India - Exchange Rate, INR/US$|
A number of coal- and gas-fired power plants have already reported severe fuel shortages, and many utilities have resorted to importing coal. For instance, Bloomberg reported on May 27 that NTPC, the second largest power utility in Asia by value, would almost double purchases of coal from outside India this fiscal year. However, the weakening rupee would drive up the cost of fuel imports and generation, and cash-strapped utilities might be unable to import sufficient coal. Higher fuel import prices could also make operations financially infeasible as electricity prices are strictly controlled, and utilities could shutter unprofitable capacity. Electricity prices are also unlikely to be increased in the near future as government will maintain populist policies until the general elections in May 2014.
We note that the currencies of several other Asian economies have also weakened substantially along with the rupee, and that higher fuel import costs will affect generation in these countries. Pakistan and Indonesia, in particular, are highly susceptible to higher fuel costs, and we have made slight moderations to our forecasts accordingly.
Taiwan: Economy Still Shaky
We have also revised down our short-term power forecasts for Taiwan on the back of economic weakness. While the country has experienced a slight trade rebound in recent months, we maintain our relatively downbeat outlook on Taiwan through 2014 as we expect Chinese demand to slow down. Weakness has also been evident within the domestic economy. Industrial production has been in contraction while retail sales growth continues to maintain its downtrend. This has led us to revise down our 2014 real GDP projections for Taiwan, and we now expect growth in 2014 to come in at 3.0%, down from 4.0% previously.
| Further Weakness In Store |
|Taiwan - Export Orders Growth, % chg y-o-y|
This poor macroeconomic picture has led us to moderate our electricity consumption forecasts, particularly in terms of consumption from industrial production and households. Our full-year outlook remains bleak despite a potential return in investments from mainland-based Taiwanese businesses ( see 'Investment Resurgence Not A Structural Positive', March 14) as we have yet to see evidence of the approved investments actually materialising.
Key Themes Beyond 2014
We expect the structural weaknesses in India and Taiwan to extend beyond 2014, and have made minor moderations to our medium- to long-term forecasts accordingly. Our forecasts for the majority of other Asian countries remain stable however. Overall, we forecast electricity consumption in Asia to grow by an average of 5.71% per annum between 2014 and 2022 (down from 5.75% in our Q413 report).
We believe that several key themes will play out in the Indian power sector over the medium- to long-term, and have revised down our forecasts to account for these.
Economic weakness beyond 2014 - Our Country Risk team had downgraded their FY2014/15 real GDP growth forecasts to 6.0% from 6.7% previously. We believe the more conservative outlook for economic activity and household consumption will negatively impact the electricity sector.
Continued coal shortages - Coal production continues to be hindered by the protracted period of time required to gain environmental approval, as well as the challenges faced in acquiring suitable land for opening new mines. Moreover, a lack of competition and red tape within the coal mining sector are among the direct causes of the country's coal shortages and import reliance. The recently passed land acquisition bill could hasten development of the country's coal resources, but does contain several unfavourable terms for investors.
Lack of financing for new capacity - State government indebtedness is a major obstacle to marshalling the massive infrastructure investment required and a lack of depth in the Indian financial sector also limits funding options.
With regards to Taiwan, we highlight that China's industrial progress over the years is likely to affect energy-intensive industrial production. China has progressively moved up the technology value chain over the last decade, and is increasingly a competitor to Taiwanese manufacturers. For instance, China has moved from low-margin back-end manufacturing to the lucrative design and licensing phase of semiconductor manufacturing, an important pillar of Taiwan's semiconductor industry. This trend is likely to continue as public financing is ploughed into R&D and foreign intellectual property is assimilated, and we have moderated our electricity consumption forecasts accordingly.
| China Playing Catch Up |
|Global - Semiconductor Materials Sales, US$bn (LHS) & % chg y-o-y|
Regional Fundamentals Still Strong
While we have moderated our forecasts for several countries in the region, we note that the regional fundamentals for the Asian power sector remain extremely strong. This is because of three main factors:
Strong economic growth: We believe that emerging Asia is set to outperform the global economy over the medium- to long-term due to positive demographic and structural factors ( see 'Global Assumptions - Q4 2013 - Update', August 23). While the era of double-digit real GDP growth might be over, we note that the Chinese, Indonesian and Indian economies are set to grow at relatively healthy rates, and this will drive electricity consumption growth.
REGIONAL REAL GDP GROWTH, % CHG Y-O-Y
| ||2012 ||2013f ||2014f ||2015f |
|Source: BMI |
|Emerging Asia ||6.9 ||6.7 ||6.2 ||5.9 |
|Latin America ||2.8 ||2.6 ||3.2 ||3.5 |
|Emerging Europe ||2.7 ||2.3 ||2.9 ||3.3 |
|Sub - Saharan Africa ||4.4 ||5.5 ||5.6 ||5.8 |
|Middle East & North Africa ||6 ||3.5 ||4.4 ||4.3 |
|Developed States ||1.4 ||1.1 ||2 ||2.1 |
Low electrification rates: Electrification rates in Asia are relatively low at present - approximately 78% of households in Asia had access to electricity in 2009 - and are set to increase alongside economic and technological development in the region. To be sure, several countries in the region have already initiated programmes to improve electrification rates, such as the development of the first 500kV transmission line in Myanmar ( see 'Myanmar Transmission Project Desperately Needed', March 6).
| Diverse Electrification Rates |
|South East Asia - Electricity Access In 2009, %|
Positive regulatory developments: A number of governments in Asia are pushing for greater competition, transparency and sustainability in their power sectors through various reforms. For instance, Indonesia is in the process of increasing electricity prices by 15% by the end of 2013 ( see 'Expectations For Power Sector Unchanged Despite Regulatory Changes', February 21). Meanwhile, Vietnam is in the process of establishing a competitive electricity market, having introduced a competitive generation market in July 2012 ( see 'Numerous Challenges For Private Investors', October 9 2012).