Thermal Coal Investments

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Thermal Coal Investments: China Fires Up a New Age for This Commodity

by Tony Daltorio, Investment U Research
Monday, February 1, 2010

The price of thermal coal recently broke through the psychological $100 barrier for the first time in more than a year, just as a wave of brutally cold weather and heavy snow hit China. That storm disrupted mining operations and railway transportation, causing widespread panic buying among Chinese utilities that rely on thermal coal to fire their power plants, especially since they were running low even beforehand.

Those shortages strongly indicate a major market change, as China changes from a coal exporter to an importer, despite it having the world’s third largest coal reserves. It began months ago, with Beijing clamping down on illegal and unsafe mining, a move that forced hundreds of small mines in the key coal producing province of Shanxi to shut down.

That meant China had to begin purchasing large amounts of thermal coal from overseas, including some areas outside of its traditional supply bases of Australia, Indonesia and Vietnam, where it obtains over half of its intake. It even had to go further than Russia, Mongolia and Canada, its second-tier suppliers. In fact, it had to turn to Columbia for the first time ever last month.

The preliminary import data for 2009 show that January – November 2009, Chinese coal imports rose almost 500%, while coal imports for November alone increased almost six times more than the previous year. And analysts estimate China had net imports of more than 50 million tons of thermal coal altogether last year, a huge U-turn when compared to the 70 – 80 million tons the country exported just five years ago.

Those are the kinds of signs savvy investors pay attention to…

Thermal Coal: Demand From China Runs This Market

Before China shifted from exporter to importer, mining companies had to deal with low prices due to lackluster demand in Japan, South Korea and Taiwan, the traditional markets for thermal coal. But according to most industry insiders, China is set to continue buying significant quantities of thermal coal from overseas, ushering in a new age for the commodity.

Clinton Dines, former China CEO for BHP Billiton ADR (NYSE: BHP) – the world’s largest mining company and a significant coal producer – believes: “China is going to be a coal importer of some scale from now on.”
Richard Navarre, president of Peabody Energy (NYSE: BTU), the world’s largest private-sector coal company, agrees: “We think that China is going to continue as a net importer of coal.” And he added that consumption in the Asia-Pacific basin “is continuing to strengthen.”

It looks likely that the thermal coal price rally could continue during this current quarter on increasing electricity and coal demand from China, not to mention the rest of Asia, as Mr. Navarre pointed out. Analysts expect India especially to continue importing large amounts of thermal coal this year, as it expands its power generation capacity.

Just to compound the problem further, as demand increases, export infrastructure constraints tighten the seaborne market further. At Newcastle, Australia’s largest thermal coal export port, the ship queue recently reached a two-year high, with 60 vessels waiting to upload their cargo.

Eight Thermal Coal Stock and ETF Investments

Between rising demand and supply bottlenecks, the spot price for the benchmark thermal coal in the Australian market has risen to about $105 a ton, the highest it’s been since November 2008, and up 60% from the March 2009 low of $61 a ton.

It’s an important indication, considering that the commodity is relying much more on contracts linked to the spot market and less on fixed annual prices, mirroring other bulk commodities like iron ore and coking coal. And since none of those offer any financial futures, their price movements reflect supply and demand much more accurately.

Although spot coal prices are still well below their July 2008 high of over $210 per ton, the recent rally and China’s changing tide indicate a good year for global mining companies. Investors can play it straight with a number of businesses, including:

BHP Billiton ADR (NYSE: BHP)
Rio Tinto ADR (NYSE: RTP)
Peabody Energy (NYSE: BTU)
Consol Energy (NYSE: CNX)
Anglo American ADR (PINK: AAUKY)
Xstrata ADR (PINK: XSRAY)