China Guodian Group Corp, among the country’s top five state power producers, will merge with coal giant Shenhua Group Corp Ltd, in a deal that will create the world’s largest power utility.

The companies have been in talks about a merger for several months as Beijing aims to shake up its indebted and inefficient state sector, streamline the number of companies and create globally competitive firms in sectors including power generation, shipping and metals.

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The Guodian-Shenhua deal was announced on Monday by China’s State-owned Assets Supervision and Administration Commission (SASAC) in a one-line statement that gave no other details.

Sources say the new company will be called National Energy Investment Group.

The combined entity would have an installed capacity topping 225 gigawatts (GW), leapfrogging EDF and Enel to become the world’s biggest power company by capacity, according to Frank Yu, principal consultant for Asia-Pacific Power and Renewables at Wood Mackenzie.

It would also be the largest wind power developer with 33 gigawatts of capacity and the biggest coal producer, he said.

The deal will provide Guodian with a captive coal supply that will help manage its price risks for its main raw material, give it access to Shenhua’s infrastructure of rail, harbours and shipping fleet, as well as its deep cash reserves that will help the power producer pay off its large debts, analysts said.

Workers unload coal at a storage site along a railway station in Hefei, Anhui province.

For Shenhua, a merger with a major state power provider such as Guodian – also a leading hydropower and renewables developer – could ease its dependence on polluting coal as smog-plagued China looks to move toward cleaner fuel.

“The union of coal and utilities means both Shenhua and Guodian will balance their risks from commodities, but it will not necessarily boost its (the combined company’s) profit level,” said Li Rong, power analyst with SIA Energy.

On Friday, Shenhua’s listed unit China Shenhua Energy Co Ltd delivered its strongest interim results in four years, becoming one of the most profitable public commodity companies in the country.

Government-enforced mining capacity cuts as part of the war on smog have helped fuel a spectacular rally in coal prices in China since the summer of 2016, defying forecasts that the industry was in terminal decline and hurting utilities’ profits.

Reporting by Josephine Mason; Editing by Tom Hogue and Himani Sarkar
Reuters

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