3-Pronged Profits from China's Worst Winter

It was the worst winter in half a century in the Middle Kingdom, throwing China into a coal energy crisis and giving us several ways to play China's power problems.

You probably saw the unbelievable photos like this one:

Those are some of the hundreds of thousands of travelers stuck at a train station in Guangzhou, one of the industrial capitals of the new China. Guangdong (better known to English speakers as Canton), where Guangzhou is located, is the richest province in the country, an export titan and magnet for tens of millions of migrant workers from other parts of China.

These folks sat on their haunches for days on end, waiting for crews to clear the country's iron roads and let them get home for maybe the only time this year - this week's Lunar New Year celebration.

Migrant workers weren't the only ones waiting at the station.

Coal Shipments Resume, but Crisis Continues

This week, government-run newspaper Xinhua reported record numbers of coal cars arriving at stations in the southern part of the country, where Guangdong and Hong Kong are located.

These freighters came chugging into town like contents under pressure, backed up for weeks and now hauling far more tonnage than the same time last year.

"We now have a full 10 days' supply of coal!" one local official exclaimed, while more senior national officials sounded a tone of grave concern.

Zhang Guobao, deputy head of the National Reform and Development Commission in Beijing, wrote in the Party-run People's Daily that China is far too reliant on coal, as 84% of the country's power generation comes from soot.

Only a "fragile balance" exists between supply and demand, Zhang noted.

With power outages in half of the country's provinces in January, China's power industry is clearly about as balanced as a drunk on a tightrope.

Zhang urged a major boost in wind power and nuclear energy, which is gaining steam as a "clean" alternative energy source these days.

Crisis Becomes Opportunity

China is also home to a slew of U.S.-listed solar power stocks, many of which have taken a mighty fall so far in '08.

• Trina Solar (NYSE:TSL) - down 42.5% in 3 months
• Solarfun (NASDAQ:SFUN) - down 58% in a month
• LDK Solar (NYSE:LDK) - down 23% in a month
• Yingli Green Energy (NYSE:YGE) - down 37% in a month

It's been bleak for these stocks, but there's still plenty of room to play.

My colleague Ian Cooper guided readers into a one-day gain of 20% in LDK before the recent downturn, and all of these tickers are starting to settle into a trading channel, waiting for another pop.

Solar is the best option for rural Chinese who still live in off-grid locales, as well as for household water heating in big cities. Of course, Jeff Siegel's Green Chip Stocks is all over that angle, too.

Australia & China - New Best Friends

Across the sea from China, in Australia, Chinese businessmen are negotiating buys and buy-outs, trying to secure whatever supply they can to avoid another episode like we've just experienced.

Australia is the world's #1 supplier of coking coal, which is used in steel manufacturing.

Australia's Xstrata [London:XTA] is close to a deal that would double its supply price to Japan's steel mills, chalking up the higher ticket price to severe floods Down Under and terrible winter weather in China.

That's right, the price will double, leading to an estimated A$30 billion (about 27 billion USD) "bonanza" for Australian export revenue.

That will trickle through to Aussie coal companies like Coal & Allied Industries [ASX:CNA], New Hope Corporation [ASX:NHC], and of course Xstrata. American coal colossus Peabody Energy (NYSE:BTU) may also benefit from the worldwide windfall of higher commodity prices, but with a P/E of over 50, I would hold off on that one for now.

There's also the only U.S.-listed Chinese coal play, Yanzhou Coal Mining (NYSE:YZC), which has gained over 80% in the past year. Trading at just over 25 times earnings, YZC still has plenty of upside potential if international price trends continue and the company's resource base stays strong.

Finally, if you think all of this is hogwash and China is set for a Tom Brady-esque tumble, go short like our resident China bear here at Energy and Capital, Steve Christ.

Steve has been licking his chops for over a year to short China, and even though Chinese shareholders can only go long on Shanghai and Shenzhen, we uncovered the UltraShort ProShares FTSE/Xinhua 25 Index ETF (AMEX:FXP), which returns double the inverse of iShares FTSE/Xinhua China 25 Index (NYSE:FXI).

This China short play (FXP) has surged by nearly 50% in the past few months, as nearly every market in the world has tumbled.

Whether you play it long or short, you can't afford to ignore China's energy economy in transition.

Disclosure: none

Comments

[beegdawg007]

Another way to play China is with U.S. and Canadian mettalurgical coal. China's demand for met-coal combined with other factors - flooding in the coal mining area of Australia, extreme port congestion at the Aussie coal ports, etc. - will result in met-coal (vs. thermal coal, a completely different issue) 2008 - 2009 contract prices which are up from an average of $95/Tonne in 2007 to over $200 Tonne for 2008. Since the cost of mining the coal does not increase with the price of coal, all of that price increase flows directly to the bottom line. Met coal pricing is no longer a local issue. When the price of coal goes up in China, it goes up by just as much in Alabama, Calgary and West Verginia. An added benefit for U.S. miners is the weak dollar, which now makes U.S. coal looks very cheap when compared to the rest of the world. Some stocks which will benefit from China's need for coal are FDG, WLT, WTN.to, and TCK.

I own both WLT and WTN.to. WTN.to is located in Western Canada. I like this company now because it almost all of its production of coal for 2008 is free to price at the new rates. Many other companies can not benefit from the coal price increases until 2009, because of existing contracts at much lower prices for the current production. WTN.to also has access to a good port in Western Canada. Coal is shipped from this port to Asia for about the same cost of coal that is shipped from Australia.

WLT sells most of its coal to Europe and Brazil. But the price per ton will still be up over 100% this year. WLT also manufactures COKE from Coal. WLT's COKE is all being sold at 2008 prices in the range of $370/ton, vs. $225/ton in 2007.

Another play which results for the coal trade combined with the iron ore trade - the are mixed together in blast furnaces to create steel - is driving dry bulk shipping prices through the moon. Investors might be interested in looking at a few of the drybulk maritime shippers like GNK, DSX, EXM and DRYS. All of these companies are now bouncing off of recent lows after soaring in value last year. Very low PEs exist here. For example, both DRYS and EXM are trading at PEs that are less than 6 times 2008 estimates.