This Move by China Jeopardizes Critical Supply

A lot of negative press the last several days on coal. With Goldman Sachs releasing a high-profile report predicting that oversupply will depress prices and thus stock valuations.

This is the latest in a number of analysts to "pile on" the sector. But at the same time, the global coal market continues to see little-reported developments that appear very bullish for prices.

We got another such outlook last week. With Platts noting that Chinese coal supply may be jeopardized by an unusual shift in the country: the widespread use of coal to make petrochemicals.

The group notes that a massive number of Chinese projects are now in construction aimed at converting coal to olefins. A process that is essentially the first step in using coal as feedstock for making plastics. As many as 100 separate coal-to-olefins facilities may be popping up across the country.

That's being driven by another trend I've been discussing: growing Chinese petrochemical production. The same force that's creating demand for imported volumes of feedstocks like propane and ethane from the U.S.

Analysts describe China's plans to develop coal for petrochemicals as "aggressive". Suggesting that significant amounts of coal supply here could be lost from the conventional domestic market.

This is one more place where coal supply is potentially tightening. As we've discussed, major supplier Indonesia is also making moves to restrict its coal output for the coming year, with major ramifications for the global market.

Indonesian officials backed off those promises a little this week. Saying they may allow coal production for 2014 to reach 421 million tonnes, rather than enforcing an initially-proposed limit of 397 million tonnes.

Even at that level however, Indonesian supply would be seeing 0% growth from last year. Potentially making things tighter in a market where demand from consumers like India is continuing to rise.

All to say that the widely-reported death of coal is greatly exaggerated, for a lot of reasons.

Here's to what's really going on,

By Dave Forest