Sembcorp Industries will book an impairment expense of $212 million for the first half of the year but expects to remain profitable.
In its profit guidance released before the market opened yesterday, Sembcorp said the impairment involves its 49 per cent stake in Chongqing Songzao Sembcorp Electric Power, a joint venture with Chongqing Energy Investment Group in Chongqing, China.
The impairment of $212 million represents the entire carrying value, or original cost, of the asset.
Still, Sembcorp expects to book an overall profit for the first half of the year.
Chongqing Songzao operates a 1,320MW coal-fired power plant in Chongqing and it used to get its coal from Chongqing Energy.
However, following a government directive in January for coal mines in the city to re-evaluate their operations, Chongqing Energy closed all its coal mines in the city, forcing Chongqing Songzao to source coal from other provinces.
The loss of Chongqing Songzao's mine-mouth advantage with Chongqing Energy, which enabled it to operate its power plant next to the coal mines, has resulted in much higher logistics costs for the company.
In addition, coal prices have become increasingly volatile due to restrictions on production in China, even as demand rises. Government support for the industry has also been "uncertain and insufficient", Sembcorp noted in its announcement.
"In the longer term, the asset is also expected to face competitive pressure from low-carbon power sources," it said.
Consequently, Chongqing Songzao is expected to record a net loss for the first half of the year as well as the whole year. The company turned in a profit of $19 million last year.
Sembcorp will be releasing its results for the half-year ended June 30 on Friday. Its shares closed at $2 yesterday, down 4.3 per cent.