Investing in Coal in China

Brian Hicks

Written By Brian Hicks

Posted May 7, 2013

There is no doubt that coal in China is booming right now. But just how long can it last?

Chinese coal consumption increases every single year. Right now it accounts for roughly half the global amount consumed, and since 2000, China is responsible for a staggering 82 percent of the growth in coal demand around the world.

coal picAnd today, China is not only the largest consumer, but it’s also the biggest producer and importer of coal.

Still, despite the nation having a higher coal demand anywhere else in the world, Chinese coal miners are beginning to cut back on output after incurring losses linked to cheap imports and domestic demand for hydro power.

Output vs. Input

This has some wondering if China is beginning to see its first shift away from coal power. This never would have happened a couple years ago, or even last year.

But today, small miners in China are indeed reducing output as the global coal market shuns its abundant supplies. And it is thought that bigger Chinese producers will be next.

If Chinese demand starts to wane, trade and prices across the entire landscape could be influenced.

The first signs came in March as production fell off and imports continued their usual rise. According to Reuters, output dropped 5 million tons, or 1.7 percent from last year, to 290 million tons.

But coal imports grew 20 percent on the year, as prices from Indonesia, Australia, and South Africa were simply irresistible.

Yanzhou Coal Mining Co. Ltd (NYSE: YZC), which has one of the highest unit costs among Chinese producers, has seen production go down 2 percent from a year ago.

Now, with prices falling close to production costs, some Chinese mines are seeing red, and the growth in China is slowing as a result—Chinese domestic coal prices are at their lowest since 2009.

China’s thermal coal costs, including mine production and shipping, are in the $90-$100 per ton range.

But looking at Australia, where costs are only $70-$85 a ton, and Indonesia and South Africa, where prices are $46-$55 a ton, it’s hard for China to compete. Chinese utilities, as well as others, are snatching up imports while the going is good.

It also doesn’t help that Inner Mongolia—China’s top producing province—is producing poor grades of coal that fetch even lower prices.

Producers are left with piles of coal stock and nowhere to take it as demand for hydro power and cleaner alternatives become increasingly popular in China.

The U.S. and Chinese Coal

But rest assured, consumption is still skyrocketing in China, even as production is faltering presently.

And this is good news for the U.S., who in recent years has seen a major drop in coal consumption, mostly due to the low price of natural gas.

China still needs coal as much as ever, and the U.S. is still a major producer, so as domestic demand has plummeted in the states, U.S. coal industries see the green light in China’s coal market.

Last year, U.S. coal exports reached an all-time high of 114 million metric tons. Its third largest destination was China, behind the Netherlands and the U.K.

With a rise in U.S. exports and the all too reliable Chinese demand, U.S. producers can continue to feed the big appetite that continues to grow in China. China is constantly looking for a more cost effective price, and the U.S. is one market that can provide just that.

The Economics of Coal Exports

But as another year passes on, and China adds more coal to the fire with imports from the likes of the U.S., there are naysayers out there.

Some experts see great economic risk if the U.S. gets deeply involved with coal exports to China.

They argue that China continually under-performs at its coal-fired plants. Plus, there’s the growing concern for the environment and better health standards, which could cause Chinese imports to drop off in the near future.

This past year, the capital city of Beijing saw its most hazardous air pollution in recorded history. It opened a lot of eyes and will become a political agenda moving ahead into the future.

On top of that, coal exporting countries like Australia and Indonesia are strategically positioned better than the U.S.

But leading coal companies like Peabody Energy (NYSE: BTU), the largest in the world, and Arch Coal (NYSE: ACI), the second largest in the U.S., show no signs of slowing down. In fact, they’re gearing up efforts more than ever to solidify themselves as the go-to sources for coal exports, and China is at the top of their target lists.


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