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Coal Demand On The Rise
By: Jim Nelson Friday, July 23, 2010

The market fell out of bed on Friday last week, erasing its gains for the week. Overall, since tanking after those April highs, the market has created some interesting opportunities. One of those is coal
As far as I know, despite concerns over slowing industrial manufacturing, China will still need coal. In fact, Barron's ran a piece over the weekend titled "China Still Needs Coal." The lead began this way: "Booming Chinese demand has lit a fire under Asia-Pacific coal stocks and triggered talk of a lengthy supercycle in the region's dominant fuel. Everywhere, that is, except in China."

The author points out that China's leading coal stocks are all down 25% or more of late.

The worries as far as the genuine China coal miners go were not without some basis. China, foolishly, told its miners to keep prices stable. The market read this as a de facto price cap. But that doesn't affect all of the coal companies

China consumed 47% of the world's coal last year. The growth of that demand has been mind-boggling so much so it is hard to wrap one's mind around it. I wrote about this recently in Capital & Crisis. In 2000, China consumed as much coal as the U.S. Today, it consumes three times as much as the U.S.

As I wrote in C&C, quoting Richard Heinberg at the Post Carbon Institute:

"China will be pressed to produce the coal it needs domestically. In fact, after being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year's total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia's coal exports and Australia is the world's largest coal exporter and growing.

"This means if China imports double again next year not an unrealistic scenario China will need to import more coal than Australia can currently provide," Heinberg notes. "One more doubling of import demand and China will be wanting to import 600 million tons per year, about the total amount of coal exported by all exporting nations last year."

These are good reasons to get long coal, and I have a few speculative favorites.

One is based in Mozambique. Now, this is not a country one would think to invest in offhand. But Mozambique is home to one of the largest unexplored coal basins in the world. It is a speculative gumbo, because it is still early in the game and Mozambique ain't exactly Canada.

I've been researching the Mozambique story. The Economist had a piece recently about it, which I really enjoyed, called "A Faltering Phoenix." Here's how the story kicks off:

"About two hours' flight north of Maputo, the Mozambican capital, lies the town of Tete on the crocodile-infested banks of the Zambezi River. A narrow suspension bridge forms the only crossing point for the main trade route linking landlocked Zimbabwe, Malawi and Zambia.

"Until a few years ago, Tete was no more than a dusty down-at-heel stopping point for weary lorry drivers. But now, thanks to massive foreign investment in what may be the world's biggest unexploited coal field, it is fast becoming a bustling boomtown, already boasting three banks, three car-hire companies, half a dozen decent hotels, an international school and a new airport with twice-a-day flights to Maputo."
If you are fan of old explorers and adventurers, as I am, you may recall the Zambezi River. Between 1853-56, David Livingstone of "Dr. Livingstone, I presume" fame led a majestic journey across Africa following the line of Zambezi River. Author Tim Jean writes, Dr. Livingstone "suffered 27 attacks of malaria and almost died at the halfway stage."

But I digress. Mozambique has been mostly wrecked by civil war. Infrastructure is bad, but there are railways reopening and bridges going up with the aim of knitting Tete to the port of Beira. Tete, as the above quote makes clear, is a boomtown in the heart of coal country.

Mozambique already has a large hydroelectric plant. If you are going to build mines, you need a reliable power source. This is lacking in much of Africa. There is more on the way in Mozambique, thanks to the inflow of foreign investment. There is a scramble now to lock down coal deposits and to make deals. The South Africans are the biggest investors in Mozambique. The Chinese are second.

But don't forget the "faltering" part of this phoenix. The Economist points to the many problems in Mozambique. Desperate poverty. Corruption. Crime. And international aid is more than half the total state budget. It's not an easy place to do business.

Anyway, the company I'm looking at has a potentially lucrative coal deposit. The stock has held up pretty well in this storm. I was hoping it would get knocked down. Nonetheless, the other coal miners I have on my radar right now, this is a speculation. As such, it's not a name that I can release to all 400,000 Penny Sleuth readers without artificially inflating its share price. I'm going to have to keep it reserved for my own readers
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