China’s Demand for Thermal Coal Is Losing Steam

China is the world’s largest energy consumer. It’s the largest consumer and producer of coal, and the largest importer of petroleum. It’s also the largest electricity generator.

What more, energy consumption is expected to rise as millions more Chinese move from rural areas to urban cities.

According to Reuters, China’s coal consumption reached 4.36 billion tonnes in 2016:

Years of blistering energy consumption growth have put China’s environment under increasing pressure, but with the economy slowing, China has vowed to switch to less energy-intensive industries and make more efficient use of its resources.

The average annual growth rate in energy consumption had already fallen to 2.3 percent over the 2012-2015 period, down from 6.4 percent in 2005-2012.

China said in its 2016-2020 five-year plan in March that it would aim to keep total energy consumption below 5 billion tonnes of standard coal equivalent by the end of the decade.

What was once a great situation for Aussie coal miners now means they have to get used to falling prices and fewer shipments. However, for the moment, it’s increasing demand for thermal coal, which is more efficient and better for the environment.

Strong demand in the coal market

As Aussie coal miner Whitehaven Coal Ltd [ASX:WHC] said in an announcement:

The higher quality end of the thermal coal market is experiencing stronger demand as a number of key seaborne end users are changing their quality requirements due to a greater focus on environmental and generation efficiency.

Whilst in China, the coal burnt for electricity generation is up eight per cent year-on-year due to hydro-electricity supply constraints and strength of underlying electricity demand. These factors have led to a larger than expected draw on the seaborne market.

Thermal coal was fetching an average of US$66 a tonne from the Newcastle Port in 2016. It’s now shipped for US$97.88 a tonne — a 48.3% increase.

But how long can these prices stay elevated?

According to Macquarie, thermal coal prices are unlikely to remain at US$97 a tonne. It’s too far above what the Chinese government is willing to pay long-term. Macquarie expects prices to slide for the remainder of 2017.

We have been surprised by the Chinese government’s tolerance of higher [thermal coal] prices through the summer, but there are the first signs that the steep, trader-driven rally of September has finally shaken up the authorities, bringing thermal coal prices close to a turning point,’ the bank wrote in a note this week.

Cheers,

Härje Ronngard,

Junior Analyst, Markets & Money

PS: The price of thermal coal might not be going higher. But there are many other commodities on the rise. With the right investment, you could potentially profit big-time from price spikes and windfall profits.

To find out how you could potentially electrify your returns with Aussie miners, check out what we feel are the top 10 Aussie miners trading on the ASX right now


Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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