Coal prices in China are near four year lows. But government actions and low prices appear to be helping clear the market. That would be good news for Chinese miner Yanzhou Mining (YZC 5.13%), globally diversified Peabody Energy (BTU +0.00%), and mining giant Rio Tinto (RIO +4.99%).
Shutting things down
The Chinese government has been shutting smaller and more dangerous mines over the past year or so. So far, the country has closed 1,300 such mines. It plans to do the same at another 2,000 by the end of 2015.
Couple these mine closures with Chinese coal prices near four year lows, and its easy to see how coal production in the country has fallen, year over year. As the winter heating season gets under way, however, the price of coal in the country recently inched higher for the first time in 11 months. It could be a sign that supply and demand are starting to balance.
That would be good news for Yanzhou Mining, located in Shandong Province. It has easy access to several ports, railway lines, and a river. And, being in eastern China, it is relatively close to key regional importers South Korea and Japan.
Yanzhou Mining increased production by nearly 7% in the first half of the year, likely taking market share as smaller mines shut. Weak coal prices, however, led to a near 11% revenue drop from this segment of the company. Volume gains weren't enough to offset price declines.
However, if prices start to turn higher, Yanhzhou will benefit from increased prices across more volume. That said, investing in a Chinese company may not be for you. In that case, Rio Tinto and Peabody Energy might be of interest.
"Weak" imports
In August, China's coal imports fell slightly to just under 26 million tonnes. That said, through the first three quarters, coal imports are up over 18%. China is still a big coal market and Australia, where both Rio Tinto and Peabody have material operations, is perfectly positioned to serve it.
Rio Tino increased its thermal coal production about 20% through the first nine months of the year. The company's Clermont facility ramping up and expansions in its Hunter Valley operation were notable contributors. Both of these sites are located in Australia. The energy business, however, is a relatively small contributor to Rio Tino's overall results, so it isn't a pure coal play.
Still, around 45% of Rio Tinto's first half revenues came from its iron ore business, which, like coal, is tied to China's continued economic development. This added diversification may actually interest you if you are looking for broad exposure to China's growth. If coal is your focus, though, coal focused Peabody Energy is likely the best option.
Peabody's Australian operations account for around 45% of its revenues; thermal coal is about 15% and metallurgical coal 30%. Although the company's U.S. business isn't performing particularly well right now, the weak Australian dollar has allowed Peabody to continue to compete in foreign markets where U.S. only miners are struggling. For example, the company's Australian volume increased by over 11% in the first three quarters while its U.S. coal volumes slipped nearly 5%.
Weak coal prices, however, led to a revenue decline of around 16% in Peabody's Aussie business. So, like Yanzhou Mining, coal prices moving higher in a key market could end up providing a double boost for Peabody. And, like Rio Tinto, Peabody's combination of thermal and met coal give it extra exposure to China's continued economic development.
Not a trend yet...
It's too soon to call a turn higher for China's coal market. However, now is the time to start looking at ways to play that eventual rebound. Yanzhou Mining provides direct Chinese exposure, while both Rio Tinto and Peabody are global players with notable exposure to China and its economic development.
