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China has traditionally been a major coal exporter … but tight supplies and surging demand is churning up promising investment opportunities.
China has been growing so fast that it has to supplement its domestic coal production with imports. China imported a whopping 16.07 million tons of coal in June alone, an all-time high and a 500 percent increase from the same period last year.
You see, coal is the primary source of power for a country with 1.3 billion people. The environmental crowd hates it because it is dirty and produces greenhouse gases and acid rain. No coal strip mine will ever win a beauty prize.
Coal, however, accounts for 25 percent of the world’s energy needs. In comparison, oil accounts for 39 percent of the world’s energy needs and natural gas accounts for 22 percent.
The reason coal is so popular is simple: It is cheap and abundant.
The chances are high that whenever someone flips on a light switch in China, that electricity came from a coal-powered electrical plant.
FACT: Coal accounts for more than 70 percent of China’s electricity.
China’s coal consumption is growing, and it is building coal-powered power plants at a breakneck pace. Why? Because they are much cheaper to build and operate than any other power-producing option.
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| China’s coal consumption is projected to rise to 3.4 billion tons a year by 2020. |
China is power starved, and coal is the main resource used for generating electricity in the country. As I said earlier, 70 percent of China’s electricity is generated from coal-fired power plants, so any growth in the Chinese economy will automatically lead to more demand for coal.
According to the Chinese National Bureau of Statistics, China consumed 655 million tons of coal in the first quarter of 2009, a 3 percent year-on-year increase.
The Chinese National Energy Administration says that China will use 3.4 billion tons of coal a year by 2020. Zhou Dadi of the NDRC Energy Research Institute said, “Our economy, especially the industrial sector, is growing. It’s unreasonable to maintain a low growth rate, because we are currently in the industrialization process.”
China alone uses more coal than the United States, Japan and Europe combined. China is also the world’s top producer of steel, a big burner of coal.
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More coal-fired power plants are on the way. Let this statistic sink into your brain — China is activating one new coal-fired plant every week of the year. Every week!
China is adding 100 gigawatts of coal-fired electrical capacity a year. That’s another whole United States’ worth of coal consumption added every three years, with no stop in sight.
The reason for the high demand is simple: Per unit of energy delivered, coal costs about one-fifth as much as oil.
And forget about green energy (at least for China). It costs about 3-cents per kilowatt-hour for coal-fired electricity. Wind power costs 15 cents and solar power costs 30 cents!
Much of the rest of the developing world, by the way, is on a similar coal-sucking path.
Steel Production Requires Coal
The second-thirstiest consumer of coal is the steel industry. Steel production uses a different type of coal though. Low-carbon, low-quality coal is used for electricity generation, but the high-carbon, high-quality coal is used to produce steel.
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The Four Shades of Coal Coal is classified into four types — lignite, sub-bituminous, bituminous, anthracite — based upon how much carbon it contains. The higher the carbon content, the more heat it throws off. Lignite is the lowest rank of coal with the lowest energy content. Lignite is mainly burned at power plants to generate electricity. Sub-bituminous coal has a higher heating value than lignite and contains 35 percent to 45 percent carbon, compared to 25 percent to 35 percent for lignite. Most sub-bituminous coal in the United States is at least 100 million years old. Bituminous coal contains 45 percent to 86 percent carbon, and has two to three times the heating value of lignite. Bituminous coal is used to generate electricity and is an important fuel and raw material for the steel and iron industries. Anthracite contains 86 percent to 97 percent carbon but has a heating value slightly lower than bituminous coal. |
Coal is baked in hot furnaces to make coke, which is used to smelt iron ore into iron needed for making steel. It is the very high temperatures created from the use of coke that gives steel the strength and flexibility for products such as bridges, buildings, and automobiles.
Guess what country is the world’s largest producer of stainless steel? China.
Between coal-fired power plants and steel production, the demand for coal is going to be steady and reliable for decades to come.
When you need that much coal and have a mountain of money in the bank, the smartest thing to do is buy a coal company. That’s exactly what Yanzhou Coal (YZC); the largest coal company in China did last week.
Ever heard of Felix Resources (FLX)? It is the largest coal miner in Australia, and it just agreed to a $2.9 billion takeover offer from China’s Yanzhou Coal.
The total value of the offer is $18 (Australian) a share, a 6.5 percent premium to the last price before the announcement.
A lot of experts thought Felix was worth $20 to $25 a share, so it looks like Yanzhou Coal not only secured access to decades of coal, it got a bargain in the process.
Now, Yanzhou’s offer for Felix will be reviewed by Australia’s Foreign Investment Review Board, which will determine if the deal is in Australia’s national interest, but there doesn’t seem to be any significant opposition from Felix’s Board of Directors or Australia’s politicians.
This is just another in a long line of Chinese purchases of key strategic mineral and natural resource companies.
Yanzhou’s purchase of Felix would be China’s third-largest foreign deal this year and brings the total Chinese shopping spree in Australia to $2.2 billion.
Aluminum Corporation of China (ACH) offered $14 billion for a 9 percent stake in Rio Tinto (RTP), but abandoned an additional $19.5 billion investment in Rio Tinto when the Australian government opposed the deal.
Emerald Energy (London: EEN), a UK oil and gas explorer, has agreed to a $322 million takeover from China’s state-owned Sinochem Corporation (Shanghai: 600500).
China is gobbling up those natural resource companies because it is still growing like a weed. Unlike our stimulus packages, which have yet to give the U.S. economy any meaningful boost, China’s economic stimulus package has worked like a charm and ignited a new boom in construction.
That boom is driving steel and steel-making (metallurgical) coal prices higher. Last month, China produced a record 50.7 million tons of steel, and most of the forecasts I’ve seen forecast that coal demand in China will grow by 13 percent annually.
In fact, coal supply is so tight in China that Consol Energy (CNX) sold 88,000 tons of steel-making coal to the country in a rare overseas deal due to shipping distance.
U.S. coal companies are jumping in anticipation of that Chinese demand. Last week, Massey Energy (MEE) was up 6.4 percent, Peabody Energy (BTU) by 5.4 percent, and Consol Energy by 5.8 in a single day.
My point is pretty simple and one that I’ve repeated in this column many times: YOU HAVE TO GET LONG WHATEVER CHINA IS BUYING!
This week, coal is in the spotlight, but the list of China’s shopping list is long: Oil, natural gas, iron, uranium, potash, copper, gold, alumina, and cement are the obvious examples.
I need to disclose that my Asia Stock Alert subscribers already own Yanzhou Coal and are sitting on a FAT open gain, but I expect even more. If you’re more of an ETF investor, take a look at Market Vectors Coal ETF (KOL).
Its top holdings include: Bucyrus International (BUCY), China Coal Energy (PINK: CCOZF), China Shenhua Energy (PINK: CSAUY), Joy Global (JOYG), Massey Energy (MEE), Peabody Energy (BTU), PT Bumi Resources (BUMI), Walter Energy (WLT), and Yanzhou Coal (YZC). Coal is dirty but it is also a gold mine.
Regards,
Tony
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