WE lowered the estimate for power generation growth in China this year but expected a gradual rebound in the second half. The growth clip will be among the weakest in recent history.

Power consumption of the industrial sector (74 percent of total) was particularly weak compared with residential and commercial sectors. We expect only gradual improvement in below-trend power demand in the second half, unless there are clearer signs of new and large-scale infrastructure projects (e.g. property, transportation) which could drive power demand from energy-intensive industries such as steel, aluminum and copper. Otherwise, events such as global destocking in steel may dampen power demand further in China.

Hence, we cut our 2012 year-on-year growth forecast of power generation in China to 7 percent from 9 percent, assuming second-half power generation grows 10 percent year on year. To gauge economic recovery in the second half, we will monitor if sequential changes of monthly power generation are above trend.

Economic weakness

Data reported by the authorities and individual power producers in China seems to show some inconsistency, reminiscent of periods of prior economic weakness, e.g. the Asian financial crisis and global financial crisis.

We do not believe changes to power consumption mix and energy efficiency gains fully explain the divergent trends, especially when the divergence tended to disappear shortly after those economic downturns. But we do not have sufficient evidence to explain the key causes.

Is industrial production is growing much faster than power demand? Generally, their growth rates are almost in sync over a long period. Over 2002-2011 on a monthly basis, industrial production tended to grow slightly faster than power generation, with both median and average gap of only 2 percentage points. However, the gap grew rapidly to a peak of 15 percentage points in November 2011 (global financial crisis) and again to 10 percentage points in June 2012 (current economic downturn).

Is national power generation growing much faster than that of major power producers? Given that major power producers usually focus on regions with higher power demand and capacity growth, we expect they have higher generation growth rates than the national average. However, we note that the national average growth rate overtook some major power producers suddenly during global financial crisis and the current economic slowdown. We are unsure which (smaller) power producers could make up for the slower growth at the major power producers in these periods.

The article was based on a Goldman Sachs research report dated June 17. The opinions expressed are their own.

By Franklin Chow and Viola Zhang