by Tony Daltorio, Investment U Research
Friday, April 23, 2010
It happened quietly… the first time that China became a net importer of oil since the 1960s. And back then, the Asian giant brought in a mere 30,000 barrels per day.
Today, it imports 5 million. Quite the difference, to say the least. But that’s what happens when the world’s most populous country switches from an exporter to a net importer of any particular resource.
Of course, the impact on prices doesn’t emerge over night. But with time, as importing needs grow larger and larger, prices generally move higher… much higher.
In that past, it’s happened with oil and other commodities such as soybeans. Now, it’s coal’s turn.
The One That Started It All
Last year, China became a net importer of coal for the first time. Between coking coal – used in steel-making – and the thermal coal used to fire power plants, it brought in an extra 104 million tons.
Compare that to the 80 million tons in net exports it sold as recently as 2003. But with the country growing at such a rapid rate these days, it needs more than the 3.3 billion tons it mines locally.
In part, this shift is due to Beijing’s clampdown on illegal and unsafe mining, which has forced the closure of hundreds of small mines.
The government has also restricted production by consolidating the industry in the Shanxi province, home of China’s most easily accessible reserves. It’s also turning its focus on Henan, another key area. And Shandong and Inner Mongolia are likely next on the list.
By consolidating, Beijing wants to improve safety and environmental performance. Over the longer-term, it wants to raise output, even as it closes inefficient and often dangerous smaller coalmines. And it wants to see large coal companies such as Yangzhou Coal ADR (NYSE: YZC) get bigger.
Through its actions, China is helping to revive the global coal industry. But it isn’t alone in that.
India and the Rest of Asia
Though smaller in size, India’s huge and rising coal needs are just as critical.
Emmanuel Fages, a coal analyst at Societe Generale, forecasts that it will overtake South Korea as the world’s second largest buyer before 2020.
Currently, the World Bank estimates that 40% of India’s homes don’t have electricity. To combat that problem, the government is expanding its coal-fired power generation capacity. It sees the resource as a means of spreading electricity and combating poverty.
Adding to coal’s potential, both South Korea and Taiwan want to move away from crude oil.
And Vietnam, which exports a fair amount of coal, has signaled that it might need to import before too long as well. Its government even estimates it could need as much as 100 million extra tons a year by 2020.
The Global Coal Industry
Taken aback by the upturn in demand, the industry barely knows how to cope.
Key exporting in countries like Australia – the world’s top coal exporter – have already developed bottlenecks. Bottlenecks occur when arriving shipments outweigh the ability to handle them efficiently.
Coal terminals at Newcastle, Gladstone, Dalrymple Bay and Hay Point all currently suffer under constraints that force vessels to wait weeks before they can load their cargo. The same goes for Richards Bay in South Africa.
Yet traded volumes on the seaborne coal market are only set to rise. By the middle of the decade, they should hit 1 billion tons a year, a remarkable growth from less than 50 million tons in the early 1970s.
And while the economic crisis has had some affect on prices, it hasn’t been able to slow it down that much. Australian thermal coal – an industry benchmark – surged to above $100 a ton this year. Meanwhile, miners and steelmakers have closed contracts for April-June coking coal at $200 a ton, the second highest level yet for quarterly arrangements.
Companies Set to Profit From Coal’s “China Moment”
With rising prices and demand for coal, the battles have begun to secure business with Asia. Peabody Energy (NYSE: BTU), for one, is locked in a tussle with Hong Kong-based Noble Group for control of the Australian coal miner, Macarthur Coal.
A strategically important business, Macarthur Coal is the world’s biggest producer of seaborne pulverized coal or powdered coking coal, which is used to make steel.
As for Peabody, it ranks fifth in Australia’s coal industry and plans to double its exports in the next five years. But in order to do that, it really needs to make good on the Macarthur deal.
While it may or may not get what it wants this time around, other coal companies can practically sit back and watch the profits come in. BHP Billiton ADR (NYSE: BHP), Rio Tinto ADR (NYSE: RTP) and Anglo American ADR (OTC: AAUKY) are all perfectly placed to take advantage of the situation.
Indonesia has less acute problems than Australia and South Africa and should ramp up its coal exports through 2015. After that, however, expect its domestic need to increase and therefore, its exports to fall.
But for the time being, investors should have at least a piece of this rock in their portfolio.