Three Reasons to Bet on the Shipping Sector

The Other Black Gold

Coal inventories in China are dwindling fast. Accounts vary, with one press report saying 32 power plants have had to shut down due to insufficient fuel. Others say overall inventories are down to less than eight days' worth of consumption.

Either way, it's low.

Compare that to current inventory levels in the U.S., which now stand at around 55 days and typically average 50 days, according to Paul Forward, a Washington D.C.-based coal stock analyst at Stifel Nicolaus, in a recent research report.

One way or another, China will need to replenish those inventories to more sustainable levels (albeit likely lower than U.S. ones), or risk continued power-supply issues into the Olympics this summer. To a lesser degree, at least in terms of the volume of coal needed, it also needs the coal for producing steel, a vital component for the construction of new buildings and machinery. The metal is made from coked coal, limestone and iron ore.

But the problem for China is that it won't be able to meet that need solely by using domestic sources. Instead it will have to turn to the global market and ship it in from overseas.

China will flip from net exporter of thermal coal in 2007 to a net importer this year, according to recent Australian Bureau of Agricultural and Resource Economics projections. That's partially as a consequence of increases in electrical generating capacity, but also as a result of the shuttering of some less-efficient domestic coal mines, analysts say.

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