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Two Undervalued China Coal Stocks

NEW YORK (TheStreet) -- Coal remains a key energy source contributing about 30% toward world electricity generation. It is the most abundant and widely distributed fossil fuel and it's an affordable energy source. China is the world's largest producer and consumer of coal and will continue to remain one with the kind of growth forecasted for the power and steel industry.

We have identified two stocks which we believe are value picks, will benefit from the growing China story and should carry weight in a portfolio. The stocks are SinoCoking Coal and Coke Chemical Industries (SCOK), and Yanzhou Coal Mining (YZC). Both the stocks have corrected between 15% to 35% during the past month and present an attractive buying opportunity.

According to the International Energy Agency, electricity production in China is expected to more than double to about 5,000 terawatts-hours by 2015 from 2,300 TWh in 2004, thereby indicating a huge demand for coal. According to data released by the China National Bureau of Statistics, the country's coal production grew 28% year over year to 751 million tonnes during the first quarter ended in March.

Strong domestic demand and the supply-demand mismatch have rocketed coal prices in China to stratospheric levels during the past few years. Average prices of coal at Qinhuangdao port, the benchmark price in China, have gone up by 38% to $117.27 per metric ton in May from $84.90 per metric ton in July 2009.

Moreover, on the steel front, crude steel demand is expected to grow 8% to 10% during 2010 to 610-620 million tons, driven by the stimulus packages, increasing fixed-asset investment, strong retail sales, and higher exports, according to the China Iron and Steel Association. This will have a positive impact on demand for coke and coking coal, the primary ingredient used in steel production.

Furthermore, the severe demand-supply mismatch in coking coal and China's emergence as a major importer of coking coal are likely to be the key drivers of coke prices in the future. According to Business Standard, the demand for coking coal in China is expected to grow at about 8% annually vis a vis domestic coking coal production growth of 4%.

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