24 May 2019

Long-term prospects for coal open to question

As major coal companies and power producers in China prepare to kick off negotiations over coal contract prices for 2014, suppliers seem to have the upper hand as thermal coal prices in the country have hit a multi-month high.

Buoyant cement prices and a rise in the Baltic Dry Index — a gauge of marine shipping rates for dry bulk cargo — have reinforced the view that economic activities have picked up, putting the coal sector on a steady course of recovery.

With improved demand and eased excess capacity in the sector, key coal suppliers such as China Shenhua Energy (01088.HK) and China Coal Energy (01898.HK) saw their share prices outperform Hong Kong’s benchmark Hang Seng Index over the last month. In contrast, electricity producers such as Huaneng Power International (00902.HK) and Datang International Power Generation (00991.HK) were subdued.

On the surface, things do seem to be moving in favor of the coal plays. But investors need to bear in mind the structural changes underway in the power generation sector which could be detrimental to the coal industry in the long run.

The National Energy Administration on Wednesday unveiled its estimate for installed power capacity across the country this year. The data shows the ratio of fired-power installation will for the first time fall to below 70 percent, reflecting Beijing’s efforts to curb the use of dirty fuels amid deteriorating air pollution in the country.

With the country set to embrace more renewable energy sources like wind, solar and nuclear in the coming years, demand for thermal coal is likely to be kept in check in the future.

– Contact the writer at [email protected]


EJI Weekly Newsletter

Please click here to unsubscribe