Supply Side Shock in the Making

There are few sectors as maligned and hated as the coal sector right now.

At the macro level this results in a halt on capacity expansion globally as investment capital is reluctant to enter the sector.  

So, a sort of supply side shock, if you will.


One the demand side, there is no such commensurate stasis in demand, and there is not likely to be for many years to come, as developing countries continue to industrialise and modernise and as poor nations see acceleration in urbanisation.

According to the World Bank, developing countries representing more than half the world's population currently consume energy at a rate which is between just one-fifth and one-half of their developed country counterparts:



So the demand for energy is going to continue to rise dramatically for many years to come, especially in Asia, which is the market serviced by Australia:



According to the US EIA, energy consumption in Asia is going to grow from ~220 btu in 2020 to ~280 btu by 2030 (a 27% increase) and by a further 25%and 17%, respectively, in each of the subsequent decades.

Between 2020 and 2040, energy consumption is expected to grow by around 60%, according to the US EIA (from 220 btu in 2020 to 350 btu in 2040).

The IEA in its World Energy Outlook 2020 report, is even more bullish on Asian power demand, predicting more than a doubling in energy generation in Aisa between 2019 and 2040.





While coal will surely lose market share in Asia going forward, a large part of that large increase in electricity generation in Asia will still be be satisfied by increasing coal fired power; according to the IEA, by a very significant 82% increase in coal electricity generation.

[Note that this is based on a scenario of current stated policies which will probably change, but no matter how it is viewed, demand for coal power generation is still certain to increase over the next two decades (we can speculate and debate to what extent that rate of increase will be, but one thing that can't be argued is that demand for coal from Asia will be lower and not higher over the coming decade or two.)]


CONCLUSION:

So what we have going on the the global coal stage is static (and possibly even falling) supply while demand continues to increase.

Based on the fundamental principles of economics, when supply of an economic good or service remains constant and demand for that good or service rises (i.e., the supply curve remains static but the demand curve shifts to the right, from D1 to D2), the result is an increase in the price of that good or service, from P1 to P2:

  



This has me very bullish on the outlook for coal prices over the next few years.

Accordingly, I have been buying shares in NHC in recent weeks.

I am happy to be involved in a business whose product, while no longer suitable for the energy mix in rich countries, still plays a fundamental role in powering development in poorer countries, thereby lifting millions of people out of impoverishment.


PS.  By way of analog, the situation in the global coal industry is very similar to what happened to the overall resources sector following the Asian financial crisis in 1998 right through to the global economic recession that ended in 2003. Over that period there was also significant under-investment in capacity (i.e., a supply-side shock), which culminated in the very powerful commodity boom of the late 2000s.