With most coal stocks slowly rebounding after their considerable declines over the last six months, many investors are left wondering whether or not the time is ripe to buy back into Chinese coal positions. One of the biggest coal companies in China, which we will utilize to reflect the future of coal as a whole is Yanzhou Coal Mining Co. (NYSE:YZC). The following will focus on the future of the coal industry in China as well as the potential risks and benefits to be seen by holding a position such as Yanzhou Coal Mining Co.
In examining the future of Yanzhou Coal Mining Co. the most important factor is to assess whether or not the People's Republic of China will seek to limit its dependence on Carbon emissions in coming years. Surprisingly, recent reports emerged in which China revealed that it is intending to place an absolute cap on all carbon emissions in advance of the 2015 climate talks in Paris. The problem with the ambitious goal to reduce Carbon emissions however is that any program to do so would signify decreasing China's reliance on coal. Fortunately for Yanzhou Coal Mining Co. this doesn't appear to be the case:
It is very unlikely that demand for thermal coal in China will peak before 2030... Despite efforts to limit coal consumption and seek alternative fuel options, China's strong appetite for thermal coal will lead to a doubling of demand by 2030.
Stated William Durbin, the president of Beijing-Based global markets, according to Wood Mackenzie an energy research and consulting firm. Another thing to keep in mind is that overall coal consumption in China is currently being strengthened by the ongoing construction of coal-fired plants, which are necessary to manage China's rising demand for power, which is estimated to almost triple to 15,000 TWh by 2030. China is currently the world's largest importer of coal and even though it has invested heavily in its nuclear, wind, solar power, and natural gas development programs, reports estimate that no other energy source will replace its coal demand for the next two decades.
One of the problems that has now arisen however is that the current Chinese price of thermal coal is below the cost of production for more than 90% of domestic miners. That being said, if these statistics remain the same in coming months then no one in mainland China will be making money at current prices. If this persists the potential losses may cause certain coal mines to close in the long term. In addition another analysis of the situation in China by Bloomberg New Energy Finance predicts that:
Renewables will make up more than half of new power capacity growth in China to 2030, across a variety of plausible scenarios…
The analysis also concluded that coal's dominance will be challenged by a series of factors which include:
--Faster technological improvement and cost reductions achieved by renewable energy technologies;
--Increased social concern and governmental regulation over environmental pollution;
--The prospects of shale gas, and;
--A potential price on carbon emissions.
The dilemma of the Bloomberg analysis is that its thesis is that China's governmental body will be looking to move away from coal power and develop its natural gas sector in a relatively short period of time, which doesn't seem very likely.
Taking everything into consideration, Yanzhou Coal Mining Co. has fallen more than 45% since January of this year and is currently trading at $9.35 a share and has a trailing P/E ratio of around 4.50. In addition, the company also gives out yearly dividends and has had no accounting issues since its inception in 1998. However the company's first-quarter results displayed sales and profits that were down significantly since the Q1 of the previous year and its Q2/h1 did little to remedy the situation. With the coal contraction continuing the repercussions (if it doesn't begin to subside) could be disastrous in the long term. Another issue to consider is the high costs Yanzhou is now having to face exporting thermal coal from Australia, where many of Yanzhou's mines are currently located. Presently, the average price to export a ton of coal is $80 per ton and $90 per ton for Yanzhou.
The only way for Yanzhou and the other Chinese coal companies to turn the tide is if the overall prices for thermal coal begin to increase, which at this moment is difficult to predict. That being said, China's demand for energy is going to explode in the next two decades and the necessity for coal in China might cause prices to rebound slightly. In conclusion, unless we see coal become cheaper, Chinese thermal-coal producing companies such as Yanzhou are going to have a difficult future ahead of them.
Out of the 28 analysts currently watching the stock, none has ranked it a buy, four expect it to outperform, nine recommend investors to hold the position, five state that it will underperform, and 10 analysts believe the position should be sold.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.