Investors are snapping up China's coal stocks, betting the country's urgency to revive economic growth will override concerns about pollution to drive demand for fossil fuels and reliable energy.
China's coal index (.CSI000820) surged roughly 10% in August, bringing this year's gains to nearly 50%, against a drop of almost 20% for the blue-chip CSI300 (.CSI300).
Flows are likewise impressed with the biggest listed fund tracking the sector, Guotai CSI Coal & Consumable Fuels Index ETF (515220. SS), reporting that its assets under management grew fivefold from a year earlier to reach 5 billion yuan ($720 million) at end-June.
Beijing must weigh short-term economic stability against longer-term goals of carbon emissions reduction, with markets betting that a focus on the former will prevail. The coal stock gains are also tracking the global outperformance of oil, gas, and mining stocks.
"Demand for coal will remain big in China. The supply of renewable energy is not stable," said Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management.
A reckless, "Great Leap Forward" campaign to slash carbon emissions would only create more peril than pollution, Yuan added, as it threatens to choke the economy and industrial output.
Poor weather has disrupted renewable energy production in China and global energy security concerns have increased after Russian gas supply cuts exposed just how dependent Europe is on energy imports.
A long drought across the Yangtze basin this year has triggered power shortages in the southwestern province of Sichuan, China's biggest hydropower producer.
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China also has not pledged to actually reduce coal consumption until 2026, offering room for growth. Production is rising and analysts expect about 200 gigawatts of new coal-fired power capacity to be built by 2025.
"Technically, the solution to power shortages is not to build more coal-fired power plants," said Li Shuo, senior global policy advisor at Greenpeace East Asia.
"Politically, though, interested groups are making a comeback, taking advantage of the need for energy security."
Profits, valuations and dividends provide the icing on the cake for money managers.
Coal stocks are "a safe investment target, due to the sector's modest valuation, continuously-rising coal prices, and relatively high dividend ratio," Guotai's fund manager Xu Chengcheng wrote on Tuesday.
Chinese coal stocks currently offer a dividend ratio of 5.8% and trade at 11 times earnings - compared with 16.4 for the broader market - suggesting they are still cheap despite the recent surge.
China Shenhua Energy Co (601088.SS), the country's biggest coal miner, recorded a 58% earnings jump in the first half. Yankuang Energy Group (600188.SS) another major coal company, saw net profit nearly triple from a year ago.
For conventional energy sectors such as coal mining, "the re-valuation has just started," said Mou Yiling, chief strategist at Minsheng Securities. Source: Reuters