The U.S. is suddenly coal country again, thanks to President Trump.
But in the real coal country—the one that sucks up half of global supply every year—demand for the black stuff is poised to deteriorate sharply over the next year. Investors hoping strong global growth and favorable U.S. policies will boost coal prices and stocks should keep focused on China instead.
Winter is usually China’s peak coal season, but this time around environmental inspections, rebounding hydropower, and slowing real-estate development are together painting a dire picture for demand. Figures released Tuesday showed Chinese power demand growing at the slowest rate since mid-2016 in October. Production of nearly every other heavy industrial product also slowed as a weaker property market and pollution crackdowns start to bite. Hydropower output meanwhile rose 17% as the effects of a nasty drought faded. Coal power production went negative for the second month in a row, falling almost 3% on the year.
The medium-term outlook is even worse. Ongoing drives to cut capacity in electricity intensive industries like aluminum and steel aren’t going away, meaning another structural step-down in industrial power demand over the coming years is likely. President Xi Jinping’s emphasis on a “better”—not just richer—life for Chinese citizens means tougher environmental enforcement is here to stay. Finally, a glut of cheap natural gas in Asia means that shutting down dirty coal plants in China is more affordable than in years past.
The one really bullish factor for coal, ironically, is the huge debt China’s benighted coal firms are carrying. Chinese regulators have a strong incentive to keep coal prices from falling too far—and have strengthened price controls over the past year—to keep coal firms and their employees afloat. “Supply side reform” only goes so far.
Still, investors hoping coal stocks will catch a tailwind from the bullish sentiment lifting most industrial commodities are likely to be disappointed. Chinese firms like Hong Kong-listed Yanzhou Coal and China Coal Energy have already sold off around 5% to 10% since mid September as coal prices have begun to flag. Share prices of Western producers like Glencore have also come under pressure. By contrast its rival Rio Tinto, the current darling of mining analysts, is rapidly selling down its own coal portfolio and recently cut its coal thermal output forecast for 2017 by around a quarter.
Coal prices aren’t necessarily set to collapse—but optimists hoping that U.S. policies alone can rescue the global coal industry and push prices higher are in for a long, hard dig.
Write to Nathaniel Taplin at email@example.com