As a nation, China’s consumption of coal continues to explode, thanks to a new stimulus package that gears the nation’s production towards infrastructure development, a relative sinkhole for energy.
Chinese Coal Consumption
Just seven years ago, China exported approximately 94 million tons of coal and imported around 10 million tons. Fast forwards to 2009, and China exported 20 million tons and imported more than 125 tons of coal to fuel its infrastructure economy.
The trend has yet to show any signs of slowdown. In March, China’s coal imports were up 165% from March 2009, a year when their imports were already up about 250% over the year prior. Total imports in the first quarter of 2010 were up 225% from the year ago quarter.
To put it simply, a bet on coal is a bet on China, with the two so interdependent on each other.
Why China Needs Coal
70% of all electricity produced in China is a product of coal, even more so this year than in years prior because droughts have brought about a slowdown in hydroelectric power. The drop in alternative energy couldn’t be any timelier, with both a construction and infrastructure boom demanding more from fragile electricity producers. Expectations for electricity consumption continue to grow, with 10% more capacity coming on board in 2010, most of which will be derived from coal-burning plants.
The Futures Look Bright
Despite a global decrease in energy consumption, coal futures have priced in even more gains from the coal industry. Coal from Newcastle Australia is becoming the most expensive, as it is broadly considered to be the price-setter for Asian energy consumption. Investors have an excellent opportunity to invest not only in today’s higher coal prices, but also those of the future, with future prices out four years as much as 20% higher than current prices on the world exchanges.
A Double Edged Opportunity
A catastrophe at Massey Energy sent the leading coal ETF, Market Vectors Coal ETF (KOL), to topple some 7% on litigation fears. However, with Asian consumption booming, investors looking for indirect access to China should look no further than coal. There really is no better investment than one that is selling at a discount to today’s earnings, with higher earnings already priced into the future commodity prices.