February 10, 2008 (Seeking Alpha) – It was the worst winter in half a century in the Middle Kingdom, throwing China into a coal energy crisis and giving us several ways to play China’s power problems.
You probably saw the unbelievable photos like this one:
Those are some of the hundreds of thousands of travelers stuck at a train station in Guangzhou, one of the industrial capitals of the new China. Guangdong (better known to English speakers as Canton), where Guangzhou is located, is the richest province in the country, an export titan and magnet for tens of millions of migrant workers from other parts of China.
These folks sat on their haunches for days on end, waiting for crews to clear the country’s iron roads and let them get home for maybe the only time this year – this week’s Lunar New Year celebration.
Migrant workers weren’t the only ones waiting at the station.
Coal Shipments Resume, but Crisis Continues
This week, government-run newspaper Xinhua reported record numbers of coal cars arriving at stations in the southern part of the country, where Guangdong and Hong Kong are located.
These freighters came chugging into town like contents under pressure, backed up for weeks and now hauling far more tonnage than the same time last year.
“We now have a full 10 days’ supply of coal!” one local official exclaimed, while more senior national officials sounded a tone of grave concern.
Zhang Guobao, deputy head of the National Reform and Development Commission in Beijing, wrote in the Party-run People’s Daily that China is far too reliant on coal, as 84% of the country’s power generation comes from soot.
Only a “fragile balance” exists between supply and demand, Zhang noted.
With power outages in half of the country’s provinces in January, China’s power industry is clearly about as balanced as a drunk on a tightrope.
Zhang urged a major boost in wind power and nuclear energy, which is gaining steam as a “clean” alternative energy source these days.
Crisis Becomes Opportunity
China is also home to a slew of U.S.-listed solar power stocks, many of which have taken a mighty fall so far in ’08.
Trina Solar (NYSE:TSL) – down 42.5% in 3 months
Solarfun (NASDAQ:SFUN) – down 58% in a month
LDK Solar (NYSE:LDK) – down 23% in a month
Yingli Green Energy (NYSE:YGE) – down 37% in a month
It’s been bleak for these stocks, but there’s still plenty of room to play.
My colleague Ian Cooper guided readers into a one-day gain of 20% in LDK before the recent downturn, and all of these tickers are starting to settle into a trading channel, waiting for another pop.
Solar is the best option for rural Chinese who still live in off-grid locales, as well as for household water heating in big cities. Of course, Jeff Siegel’s Green Chip Stocks is all over that angle, too.
Australia & China – New Best Friends
Across the sea from China, in Australia, Chinese businessmen are negotiating buys and buy-outs, trying to secure whatever supply they can to avoid another episode like we’ve just experienced.
Australia is the world’s #1 supplier of coking coal, which is used in steel manufacturing.
Australia’s Xstrata [London:XTA] is close to a deal that would double its supply price to Japan’s steel mills, chalking up the higher ticket price to severe floods Down Under and terrible winter weather in China.
That’s right, the price will double, leading to an estimated A$30 billion (about 27 billion USD) “bonanza” for Australian export revenue.
That will trickle through to Aussie coal companies like Coal & Allied Industries [ASX:CNA], New Hope Corporation [ASX:NHC], and of course Xstrata. American coal colossus Peabody Energy (NYSE:BTU) may also benefit from the worldwide windfall of higher commodity prices, but with a P/E of over 50, I would hold off on that one for now.
There’s also the only U.S.-listed Chinese coal play, Yanzhou Coal Mining (NYSE:YZC), which has gained over 80% in the past year. Trading at just over 25 times earnings, YZC still has plenty of upside potential if international price trends continue and the company’s resource base stays strong.
Finally, if you think all of this is hogwash and China is set for a Tom Brady-esque tumble, go short like our resident China bear here at Energy and Capital, Steve Christ.
Steve has been licking his chops for over a year to short China, and even though Chinese shareholders can only go long on Shanghai and Shenzhen, we uncovered the UltraShort ProShares FTSE/Xinhua 25 Index ETF (AMEX:FXP), which returns double the inverse of iShares FTSE/Xinhua China 25 Index (NYSE:FXI).
This China short play (FXP) has surged by nearly 50% in the past few months, as nearly every market in the world has tumbled.
Whether you play it long or short, you can’t afford to ignore China’s energy economy in transition.