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China Covets U.S. Coal

This Little-Known Aussie Stock Could Launch

Written by Christian DeHaemer
Posted January 24, 2013

Coal is the most-used fuel in electricity production in the world.

Over the past 30 years, the amount of electricity produced from coal globally has more than tripled.

Coal is the second most heavily-used hydrocarbon over all (after oil), but it's gaining fast. The International Energy Agency (IEA) predicts coal will surpass oil as the world's most popular fuel source within 10 years...

Coal consumption growth is mainly due to the relatively low cost of building and running coal-fired power plants and the strong demand from emerging markets countries like China and India for electricity to support their quickly growing infrastructures and populations.

There are 1.3 billion people currently without electricity in the world, and they want refrigerators and television sets just like everyone else. 

China Boosts Coal Imports

At current rates, coal consumption will rise to 4.32 billion tonnes of oil equivalent versus 4.4 billion tonnes of oil per year worldwide by 2017.

China alone will build 160 new coal-fired power plants over the next four years, and India will add another 46 coal-fired power plants.

There is a true growth trend in coal right now — and lucky for you, due to the Obama administration's crackdown on the coal industry, it is one of the most undervalued commodities in the world.

But it won't be that way forever...

You heard it here first: Coal will be one of the best-performing assets over the next ten years.

How It's Formed

Let's go back to the beginning...

Coal formed during the Carboniferous Period, known as the first coal age, which spanned 360 million to 290 million years ago. The buildup of silt and other sediments, together with tectonic movements, buried swamps and peat bogs deep under the earth. The plant material was then subjected to high temperatures and pressure, which caused physical and chemical changes transforming the matter first into peat and then into coal, the rock that burns.

Coal is found in beds or seams and is taken out of the ground either by shaft mining, or at ground level by open pit mining.

The harder the coal, the more carbon it's composed of and the more valuable it is.

Air-dried anthracite from the Klappan coalfield in British Columbia is over 85% fixed carbon — the gold standard of coal — and can be used to make coking coal for use in blast furnaces.

China, on the other hand, has brown, wet coal that burns dirty and can't be used to make steel.

China Wants U.S. Coal

China is the world's top producer of coal. It is also the top consumer and importer. In 2011, China dug up 3,520 million tonnes of coal — 49.5% of the world production of (7,695 million tonnes).

The United States was second with 993 million tonnes; India was third with 589 million tonnes.

The U.S., however, has by far the world's largest reserves of coal with 237 of the world's 861 billion tonnes. China has 115 billion tonnes of coal, and India has only 61 billion tonnes — but it is of high quality.

Obama's War on Coal

As we all know, the Obama administration has been waging a war on coal because it is dirty and fouls the environment.

In 2008, President Obama famously said, “If someone wants to build a coal-powered plant, they can. It's just that it will bankrupt them.”

Over the last year, coal production in the United States has fallen off, though there has been a bit of a rebound. The EIA reported:

U.S. coal production during the third quarter 2012 totaled 259.0 million short tons (mmst). This was 7.3 percent higher than the previous quarter and 5.8 percent lower than the third quarter 2011. The most significant increase was in the State of Wyoming, where production rose by 21.0 percent from second quarter 2012.

Exports were also down:

U.S. coal exports totaled 31.6 mmst, 15.9 percent lower than second quarter 2012 and up 21.5 percent from third quarter 2011 level. U.S. steam coal exports totaled 14.6 mmst, 16.0 percent lower than the prior quarter. U.S. metallurgical coal exports totaled 17.0 mmst, 15.8 percent below the second quarter 2012 level.

But China's Imports Jumped!

Chinese coal imports jumped 37% year over year to reach 29 million tonnes in December, the second consecutive month of record inbound shipments. Full-year coal imports reached 234.3 million tonnes, a 29% year-over-year gain — and a growth rate almost three times that achieved in 2011.

Imports are expect to remain at that level for 2013.

India also saw imports of 27% in the third quarter over 2011.

There are a number of data points that suggest China's slump is over: Manufacturing is up, auto sales are robust, inflation is constrained, housing prices are moving up slowly, and the new government is introducing a stimulus package.

In my Crisis and Opportunity trading service, I've been buying up beaten-down Chinese stocks for the past month. They are all up.

Price of Coal in China

That said, the price of coal is up just 15%, while the price of iron ore rose 80% off its low last year...

The market simply doesn't believe demand from China and India is sustainable, or it is simply too fearful in the face of political headwinds.

This gives us a nice buy opportunity.

If U.S. exports are down, and China imports are up, where is the coal coming from? 

The New York-based coal ETF (NYSE: KOL) is down more than 60%. U.S. based Peabody Energy fell from $73 to $26.14 over the last year. While I like these stocks for a second half recovery, I prefer to buy coal in a country that supports the coal industry...

That country is Australia.

Australian coal companies are currently undergoing consolidation as large companies like Peabody try to diversify out of the U.S. 

One small pure play trades in New York for just over $4 and has a dividend yield of 9%. Not only will this little-known company grow organically based on strong Asian demand, but it looks like a sure takeover target.

I'm currently doing my due diligence, but will tell you more about it next time.

Good hunting,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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