China shuts down coal burning plants…

….Time for an investment in coal?

The Chinese government acted to shut down 32 coal burning electric generating plants due to falling supplies of coal.This action comes as the amount of coal reserves for northern and central parts of the Chinese mainland reached a low of less than 7 days worth of supply.

The amount of coal that China uses to produce electricity is extraordinarily high in volume. In fact, 80% of China's power stems from coal. Coal remains marginally cheaper than oil and other substitutes for creating electricity, but with the Chinese demand in mind, it can be expected that higher coal prices are coming. This also comes as the four major Chinese coal companies worked together to strike a deal for Japanese coal, meaning that the shortage is crossing international boundaries and will soon be upon international markets.

An investment in Chinese coal is difficult because most producers are state owned and controlled. It is impossible to buy these companies on the open market as they are owned completely by the government. Though regional coal shortages should be expected, now these same shortages are affecting the worldwide markets and possibly the bottom line of US coal producers.

A shortage in China should begin to impact the world’s supply, and subsequently price, as China will inevitably seek to purchase coal for immediate use while rebuilding its current reserves. Yazhou Coal Mining company is in a perfect position to profit on the limited supply of coal and higher prices. It produces coal in five major Chinese cities. Though the company has shown little growth potential in production, it has much to gain from higher prices and a low supply.

Governments act mostly out of necessity and usually spend as much as they need to obtain the resources they want. If China acts to boost up its reserves, the result will be higher prices and better returns for investors. At this point, playing the China coal boom seems like an obvious bet. Greater demand and less production due to natural disaster is likely to put Yazhou in a prime position to profit. At 20 times earnings, it looks very cheap as well.

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