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Coal Use Shine's Light on Growth

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Frank Holmes

NEW YORK ( U.S. Global Investors) -- With coal's short- and long-term status atop China's energy mix intact, we think some domestic coal producers stand to benefit. To participate, we've taken positions in several coal producers including Shenhua Energy and Yanzhou Coal (YZC) which we believe offer tremendous potential for the China Region Fund (USCOX).

International coal prices hit $124 per ton this week, the highest levels in five months, as strong demand from reconstruction projects in Japan and reduced supply from flood-ravaged Australia has made coal supply tight. The floods in Queensland, Australia cut the country's output of coal by 15% and other big coal producers such as Indonesia, South Africa and Colombia are experiencing similar production cuts due to floods of their own.

At the end of March 31, coal prices were 33% higher than a year ago and earlier this month, mining giant Xstrata inked a one-year deal with a Japanese utility at $130 per ton, effectively setting a floor under coal prices in the near-term. That's up from $98 per ton the company made in a similar deal a year ago.

Perhaps no country is more affected by this development than China. With its economy powering ahead with 9.7% GDP growth during the first quarter, Chinese electricity use was up 13.4% on a year-over-year basis over the same time period, according to China's National Energy Association (NEA). China's overall electricity consumption is now expected to rise 12% this year, up from the 9% growth the NEA forecasted in January.

China's Electricity Council said the country may face power shortages of 30 million kilowatts during the summer so the government has moved quickly to put restrictions in place as the peak season approaches. Big industrial provinces such as Guangdong and Zhejiang are already scaling back power consumption. These reductions are likely to hinder aluminum, cement, zinc and steel output, according to Macquarie Commodities Research.

In addition, the National Development and Reform Commission (NRDC) called a meeting this week of domestic coal suppliers such as Shenhua Energy and China Coal Energy to ensure stable supplies, the China Daily said.

Coal powers the Chinese economy. The country is the world's largest consumer, gobbling up nearly half of the world's coal consumption in 2009. Coal accounted for 71% of China's energy in 2008 -- more than three times the United States' share. The Electricity Council estimates that the country's coal demand will reach 1.92 billion tons in 2011, up nearly 10% from 2010.

China hasn't always been such a glutton for coal. In fact, coal consumption actually declined from 1996 to 2000. However, consumption has shot up 180% since then and China accounted for 80% of demand growth between 1990 and 2010, according to BP.

This is because demand for electricity exploded over that time. China's rapid urbanization and rising middle class has led to an exponential number of new refrigerators, air conditioners and other appliances in homes.
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