Coal remains king in the HK market
In China's energy market, coal is king. On Hong Kong's stock exchange, Chinese coal stocks reign supreme.
Yesterday, the three coal company H shares listed in Hong Kong all rose sharply - China Coal Energy rose 5.55 per cent, China Shenhua Energy 6.26 per cent and Yanzhou Coal Mining 4.79 per cent. China Coal Energy is now up 149 per cent from its December 2006 listing price. Shenhua and Yanzhou have also done well this year, easily eclipsing the recent lacklustre performance of other H-share favourites such as China Mobile, Ping An Insurance and even Sinopec Corp (see chart).
Yesterday's upward spurt was propelled by the news that a clutch of mainland exporters had successfully forced a 28 per cent price rise on to their Japanese customers. This year Japanese buyers will have to pay a hefty US$67.90 a tonne for Chinese thermal coal, the sort burned in power stations. Last year they were paying only US$52.97 a tonne.
The price agreed was well above the ceiling of US$65 that Japanese buyers had initially said they were prepared to accept. Some, however, may end up paying even more. Not every Chinese exporter signed up to the agreement. A few, including Yanzhou, remained aloof and are rumoured to be holding out for prices as high as US$75 or even US$80 a tonne. Meanwhile, the price of coking coal, used for smelting iron ore, has risen by about 40 per cent over the past 12 months.
The immediate cause of the price hikes was Beijing's decision last year to scrap tax rebates on coal exports, making shipments to foreign buyers more expensive. But the rise in prices also reflects China's growing demand for coal.
The country is by far the world's biggest miner and burner of coal. Last year, Chinese mines produced an impressive 2.4 billion tonnes of the stuff, up 8 per cent on 2005.
But with coal providing about 70 per cent of China's total energy needs and generating 80 per cent of its electricity, demand is rising at double digit rates in line with economic growth. As a result, China has swung from being a net exporter of coal to being a net importer. In the first quarter of this year coal exports dropped 30 per cent to 11 million tonnes. Imports soared 60 per cent to 14 million tonnes.
Not surprisingly, coal prices have surged around the world, with the spot price of thermal coal at the Australian port of Newcastle rising to US$56 a tonne, despite the additional US$27 a tonne it costs to ship it to North Asia. Chinese domestic prices have nearly tripled since 2001.
Even better for the Chinese miners, this situation is unlikely to change any time soon. Despite heavy investment in natural gas, nuclear power, wind energy and hydroelectric generation, coal is going to remain China's fuel of necessity for the foreseeable future.
China's big listed companies will benefit most, grabbing a bigger share of the market as they push ahead with ambitious expansion plans while the authorities close down hundreds of China's small, inefficient and dangerous mines.
With growing demand and transport bottlenecks set to keep coal prices high, earnings per share should climb handsomely, pushing stock prices even higher over the long term. Nothing, it seems, is going to dethrone King Coal any time soon.