Shenhua's weak showing was no surprise given China's stock market slump, the plethora of more high-profile offerings in Hong Kong later this year and expectations that coal prices would fall after this year, having increased more than 50% in the last two years. Shenhua's offering was about eight times oversubscribed by institutional investors and 16 times by retail investors. In contrast, Ping An Insurance's HK$14bn IPO, the largest in Hong Kong last year, was oversubscribed 58 times.
Just a few weeks before the Shenhua offering, the director of China Coal Industry Development Research Centre, Guo Yuntao, said China needs to rein in its investments in the country's coalmines, its power shortages and coal shortages notwithstanding.
In the first quarter of 2005, investment in the coal industry grew to US$920m, rising 86% from a year earlier. Much of the investment has been in small, inefficient, and poorly regulated mines run by townships and counties. Analysts say rampant investment and falling demand could trigger a market glut.
Indeed, other signs point to further slowdown ahead. Beijing has predicted that demand for coal would gradually decline; this year, domestic consumption of coal is forecast to grow 6%, compared to last year's 12%. Further fueling the sector's slowdown is Beijing's search for alternative energy sources and its bid to slow development in coal-intensive industries like cement and steel.
One of the energy sources that has been in favor is nuclear power. Currently, China is still weighing bids by French nuclear group Areva, Westinghouse Electric Co (the US unit of British Nuclear Fuels PLC) and Russia's AtomStroyExport before deciding which of these vendors would equip two new power plants, a deal said to be worth up to US$8bn and the biggest the industry has seen in years. The supplier's willingness to transfer technology to China is reportedly a key deciding factor.