China coal: fat margins for producers as green energy movement goes on pause

Extreme weather has forced Asian governments to shift from green to black. In China, temperatures have reached 42 degrees Celsius. Power consumption has hit record levels across several provinces. Local coal companies are in for a windfall.

Just two years ago, Beijing’s ambitious target of carbon neutrality before 2060 left fossil fuel supplies and coal companies facing a decline in sales.

But priorities have changed. An economic slowdown means more focus on keeping factories running using coal. Unexpectedly high temperatures coincide with soaring industrial electricity demand as cities emerge from lockdowns. China’s industrial sector accounts for two-thirds of its total energy consumption.

The rest of the world’s aversion to buying Russian coal just means plentiful, cheaper sales for China. Russia is offering steep discounts. High quality Russian coal sold to China is being priced at a 15 per cent discount to US coking coal, usually reserved for steelmaking. That is even lower than coal mined in China.

As a result, Russian coal sales to China have accelerated. Coal imports from Russia to May are up 37 per cent compared with either 2019 or 2020. Beijing has also lifted limits on domestic production, urging companies to boost both coal output capacity and reserves. That has helped local producer China Coal Energy to expand operating margins substantially since 2019.

Exports also look lucrative. The price of coal shipments for July delivery to Europe hit a historic high last week. Shares of China Coal Energy and China Shenhua have climbed more than 40 per cent in the past year, reflecting soaring global prices. Yet even after this year’s gains, China Coal Energy trades at just four times forward earnings.

That reflects longer term risks. The impact on air pollution, plus China’s sustainability targets, cannot be ignored. But a sector that not long ago faced secular decline has gained a new lease of life.