Just two years ago, Beijing ambitiously promised that carbon emissions would peak and start to fall before 2030. That required big cuts to burning coal. This threatened the future earnings of China’s black stuff miners. China is now in hurried retreat from green commitments. One of its most promising sectors — coal-to-chemicals — stands to lose the most.
The damage has already begun. Inner Mongolia Yitai Coal has just suspended the construction of a Rmb16bn ($2.4bn) coal-to-chemicals plant in northern Xinjiang.
Beijing had bet big on converting plentiful coal to chemicals, fertiliser and coke as a contributor to fresh growth. Two years ago, relatively low costs and excess capacity at local chemical groups gave China an edge.
Everything has changed since then. Power consumption soared during extreme weather. China’s coal output and power generation hit historic records last year. World energy prices surged.
Now demand for coal is about to rise further as China’s economy reopens from coronavirus restrictions. Local power, steel and cement industries will ramp up consumption.
Shares of Yitai are down more than a tenth in the past six months and trade at just 2 times trailing earnings, less than half that of global peers. Chemical giant Hengli Petrochemical, which even planned to make polyester out of coal, is down almost a third in the past year.
That does not make the stocks good buys. The biggest hint that Beijing had abruptly cooled towards the coal-to-chemical sector came during the peak of coal shortages last year. The companies were denied access to cheaper coal covered by government price caps. Steelmakers continued to benefit. Too bad that coal now accounts for 60 per cent of operating costs at Yitai’s chemical plants.
As long as fossil fuel accounts for more than 80 per cent of China’s total energy usage, coal companies including China Coal Energy and China Shenhua are better medium-term bets for hard-nosed investors. The price risk from any tightening of green targets will be in abeyance for a while.
