Chinese government has dispatched inspectors to sniff out any potential safety hazards among the nation’s coal mines and shut them down because it aims to have zero accidental coal mine deaths during its political power transition.
“All non-state-owned mines may be suspended even for a very short period. There is no other way to guarantee zero accident,” says Chen Yanyan, an analyst with independent research company Glinfo.com in Shanghai.
Chen says that 47% of non-state mines in Inner Mongolia maybe affected and 42% in Shaanxi, meaning that, potentially, lot of coal can be taken off the domestic market in China.
“The latest enforcement of mine closure is much stricter than before. The halt is set to push coal prices higher along with seasonal demand from steel makers,” says Mu Wenxin, senior analyst with Custeel.com, another independent research firm.
As a result, coking coal, used by the steel industry, went up to 1,000 yuan per ton versus 900 on October 29.
These coal mine shutdowns also come as the expansion in Chinese economy looks to be taking hold given the latest PMI reading that is above 50.
There are also additional reasons to be more optimistic on coking coal space.
Steel demand in China has been up since early September and prices have gone up more than 10%. Gains in steel look set to go higher because China looks done dumping its excess in the global markets while infrastructure and housing are expected to ramp up. Housing, for example, may continue higher because banks are issuing off balance sheet loans and the government is looking the other way.
When it comes to coking coal, though, there is also a disparity with the iron ore imports, both ingredients in making steel (details here).
For example, Chinese coking coal imports were down in September 37.5% sequentially, and that is followed by a 21.7% in August and 3.2% drop in July. These drops come after Chinese imported huge amounts of coking coal in the first several months of the year… so all this implies that the summer was used to work off much of the existing inventory.
With Chinese coking coal inventories lower, demand likely to go higher and domestic supply now being lowered, prices on this steel input, already at the bottom, look set to go higher.
On the conference call in October, Arch Coal CEO said that coking coal (or met-coal) has bottomed out.
“Global coal markets are in the process of correcting, with the domestic thermal market building some momentum while metallurgical markets are bottoming out,” Arch Coal CEO John Eaves said.
Walter Industries (WLT) looks like the best play in the coking coal space not because of its negligible exposure to China but because, as a price taker, it stands to benefit if and when the global coking coal prices go significantly higher.
Walter was highlighted several times on this blog as to how low it could go when the stock was trading in the $100s warning that the stock could drop into $30s. WLT has been in this price range for several months now and indications are that it has established a good bottom in the lower range. All the fundamentals and technicals are pointing that the drop is over and the stock maybe set to move higher.
Early, before the market opened yesterday, it was mentioned on this blog that WLT has several technical features that point to a higher stock price with odds favoring a $13 move higher against odds of a $3 dollar move lower at which point losses could be cut. With a $3 move higher in yesterday’s trading, WLT – a very fast moving name – looks to have more mojo on the upside.