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.
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.
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