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Believe it or not, China's Terrible Pollution isn't a Reason to Hate Coal

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Pollution is an issue showing up throughout fast-growing China. Shanghai has repeatedly warned the young and elderly to stay indoors because of air pollution, earning the city and China notable negative press. While the answer of trimming the use of coal makes for good reading and seems intuitively logical, Chinese coal use is set to increase—not decrease.

A growing pie
There's no doubt that China has a big pollution issue on its hands, but it also has to find a way to satisfy the nation's nearly insatiable thirst for energy. In fact, reliable electricity is a prerequisite for growth. It would be virtually impossible for the massive country to satisfy all of its electricity needs with just one power option.

That's the big reason why coal use will continue to grow despite the negatives associated with it. And that will be good news for coal miners like Peabody Energy (NASDAQOTH: BTUUQ  ) , BHP Billiton (NYSE: BHP  ) , and Rio Tinto (NYSE: RIO  ) , all of which mine for coal in Australia. The trio covers the spectrum from thermal to metallurgical coal, so it isn't just electricity that will be a benefit, but also construction.

Met coal is used in the steel making process and, like reliable electricity, steel is a necessity for growth. BHP Billiton and Rio Tinto are also major iron ore and copper players, two other natural resources that are needed to support a growing nation. That gives the pair even more exposure to China's growth. Of the trio, only Peabody has a unique focus on coal.

The U.S. example
In addition to a rising energy tide lifting all boats, there's a second reason to expect coal to survive: the United States. Peabody notes that since 1970 coal use in the United States has gone up three-fold. U.S. emissions, however, have fallen by nearly 90%. A focus on pollution and new technology was the driver of what would, on the surface, seem like contradictory facts.

China, for its part, is doing the right things to follow the U.S. example. It is shutting older, dirtier power plants, closing inefficient mines that produce low-quality coal, installing "scrubbers," and making use of technology like coal gasification to make coal cleaner. All of these things lead Peabody to believe that coal use is set to rise in China while, at the same time, pollution will start to head lower.

A Chinese coal option
Rio Tinto and BHP Billiton are large and diversified miners, which may not be of interest if you are looking for coal exposure. And while Peabody is a great company, it's globally diversified, with about half of its business tied to the U.S. thermal market. For Chinese-focused coal exposure, a company like Yanzhou Coal Mining (NYSE: YZC  ) is a better option, but only for risk-tolerant types.

Yanzhou Mining operates out of the Shandong Province, strategically located near regional coal importers like Korea and Japan. And, perhaps more important, it has access to ports, railway lines, and a river, all of which make getting its coal to market that much easier.

Even though coal has been under pressure in China, Yanzhou Mining was able to increase coal production and sales by around 7% each through June (the latest reported data). Low coal prices hit the bottom line, but clearly the company is growing its business despite the negatives. And with an yield around 4.7%, you are getting paid to wait for better days.

Don't give up on coal
It's trendy to say that coal is a bad fuel option, but that doesn't mean it won't be a profitable investment option. Growing demand for energy in China virtually assures coal's growth in the nation. And the growth of coal in the U.S. market coupled with impressive pollution control efforts prove out that case. Peabody, Rio Tinto, and BHP Billiton all provide some exposure to the Chinese coal market, but, if you are an aggressive type, Yanzhou Mining will put you right in the thick of it.  

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  • Report this Comment On December 20, 2013, at 12:08 PM, MarkOfBeast wrote:

    Coal is in a big part responsible for China's air pollution. But let me make two points.

    1. China is not going to burn less coal because of pollution. China will burn MORE coal. As China simply does not have other alternative for energy supply, not petroleum, not natural gas, and certainly not solar or wind energy. Coal remains the most important energy supply China must rely on.

    2. The air pollution relates more to the quality of coal, rather quantity of coal. This means China must ban low quality coal and opt for more high quality coal. This is BULLISH news to US coal producers. Let me explain:

    Poor quality coal that emit heavy air pollution in China comes from several sources:

    2a. Import of poor quality Indonesia coal. This island nation owns a mere 0.6% of the world's coal reserve, but some how they are the world's No. 1 coal exporter. Their good quality coal has all depleted, they now only has the low quality craps to sell to China. China is going to shut them out.

    3a. High content of radioactive uranium in coal mines from Inner Mongolia, which account for 1/4 of China's domestic coal supply. The radioactivity pollution from uranium is what makes China's haze and air pollution so much worse. They must shut Inner Mongolia coal down, removing 1/4 of their supply. And that means a huge demand on import coal to replace the supply!

    Stick with US coal stocks!

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