International coal prices hit $124 per ton last week, the highest level in five months, largely due to strong demand from reconstruction projects in Japan. But coal supply is also tight, because of flooding in Australia, Indonesia, South Africa and Colombia.
Perhaps no country is more affected by this development than China, which experienced 9.7 percent GDP growth during the first quarter. According to the country’s National Energy Association, China’s electricity consumption will rise 12 percent this year, which could lead to power shortages. In response, the government is putting restrictions in place as the peak season approaches. Big industrial provinces are already scaling back power consumption plans. These reductions are likely to hinder aluminum, cement, zinc and steel output.
In addition, China’s National Development and Reform Commission called a meeting this week of domestic coal suppliers to ensure stable supplies.
Coal powers the Chinese economy, and China is by far the world’s largest consumer. Coal accounted for 71 percent of China’s energy in 2008 — more than three times the United States’ share. The Electricity Council estimates that the country’s coal demand will reach 1.92 billion tons in 2011, up nearly 10 percent from last year.
Demand for electricity is exploding due to China’s rapid urbanization and rising middle class. Emerging wealth means powering new refrigerators, air conditioners and other appliances in homes.
Luckily for China, it sits atop the third-largest amount of recoverable coal reserves in the world behind the U.S. and Russia. The country more than doubled its coal production from 1999 to 2009. Despite this increase, production couldn’t keep up and the country became a net importer of coal two years ago.
The Chinese government made it clear that it wants to wean the country’s power grid from coal. But that’s proven to be a difficult task. Hydroelectric, nuclear and other renewable fuels combined make up only 10 percent of total power. And the EIA forecasts that China’s coal consumption will nearly double over the next 25 years, as the economy continues to grow and electricity demand remains strong.
With coal’s short- and long-term status atop China’s energy mix intact, I think China’s domestic coal producers stand to benefit. Subscribers to my Emerging Market Winners newsletter have already made 23 percent on Yanzhou Coal Mining, ticker symbol YZC. That’s one way to light up the portfolio performance meter.
