China & Old King Coal

Of late we have commented on the correlation between commodities and the emerging markets asset class, including that of the BRICS, which can be found in “Sub-Merging markets,” and “BRICwall Cracking.”

Today we’ll delve a little deeper into perhaps the most important constituent of the BRICS family, China, and perhaps more importantly, its relationship with coal, which as can be seen below is still a very important source of Global energy, of which China has become a major player in respect of both demand and supply.

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First up, however, a peek at the Shanghai Composite stock-index shows the boom and bust of the past decade as investors’ saw a five-fold return in the 4+ year lead up to the October 2007 market top, only to suffer a 65% hit since.

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The index continues to test its 40 week moving average and remains within a contracting triangle, where the green-line offers support and the red resistance. The lower window shows that after 6 years of under-performance against an Emerging Markets Index, China has started to out-perform, albeit that a break either way from the triangle will determine Shanghai’s trend.

Moving onto China’s relationship with Coal, a final chart shows the Shanghai Comp versus the price of Coal, adjusted in $US terms to better demonstrate the close fit between them.

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The International Energy Agency predicts that China, the world’s biggest consumer of coal, will reduce demand through 2018, as the country increases its use of alternative sources of energy. To this one could add the likely reduction anyway due to the rapid slow-down evident of China’s economic growth.

Aside of pointing out the relationship above, a current major area of concern for China relates to the 50 publicly traded coal companies and the trust products that have invested into them. Investors in a high-yield product issued by China Credit Trust, which had lent to Shanxi Liansheng, faced a near 2BN Yuan ($US330m) default earlier this month, until an 11th hour bail-out by the China Development Bank Corp.

Thirteen of those fifty publicly traded coal companies have a debt-to-equity ratio exceeding 100 percent, whilst the number of maturing trust redemptions tied to coal and sold to multiple investors will jump to 19 this year from five in 2013, according to Cnbenefit, a consulting firm based in the southwest city of

Chengdu. As borrowing costs have risen, and coal prices have fallen, defaults will be hard to avoid and investors within the next ones may not be as fortunate as China Credit Trust.

Watch “Old King Coal,” it could be important for both China and globally.

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