King Coal’s counter-revolution: can Chinese price caps and ESG edicts turn back the tide?

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A strange but entirely predictable consequence of the world’s focus on environmentalism and ESG is that there’s no longer enough supply of the old style commodities that are actually used to heat the world’s homes and power its industries.


Even China, which isn’t exactly hot on environmentalism, is feeling the pinch with rolling power cuts in certain districts as energy, and particularly coal prices soar.


In the typical fashion of an authoritarian command economy the mooted solution has been price caps, with thermal coal expected to be given a cap of US$187 per tonne, some way below the prices cited by traders earlier this week in top producing areas Inner Mongolia and Shanxi.


Whether this will have the desired effect remains to be seen, although students of command economies know well enough that when the government starts setting prices, shortages are the general result.


China already has shortages though, and it does have one advantage: it’s the world’s biggest buyer of coal. If it says it’s only willing to pay a certain price then producers have a simple choice, accept or sell elsewhere.


Of course, producers inside China won’t enjoy the luxury of a free-market decision like that, and futures prices inside of China have already tanked. But the rest of the world is another matter.


The level at which the Chinese government is likely to hold in the immediate term still allows most companies plenty of room for margin, so the short-term calculation is likely to be that sellers will put up with a hit to the top-line in order to avoid disruption to established supply chains and trade routes.


But if the current situation continues, and indeed if the Chinese government succeeds in pushing the price down further as some industry watchers think it might, then international sellers are likely to go elsewhere and the Chinese energy supply chain will effectively become beholden to state subsidy.


Nothing wrong with that in a communist country, except that it does give the lie to the old Deng Xiao-Ping mantra of “one country, two systems.”


In energy policy at least, we are now regressing to a “one country, one system” environment.


But none of this is new.


Juggling the conflicting demands of energy policy has been a concern of governments around the world since the dawn of time. In the UK, energy companies are going bust because – guess what? – a conservative government, no less, put price caps on energy prices.


The Chinese are putting the price caps further back in the value chain, but it may be that the effects inside China will be the same: bankruptcies and mooted bailouts.


Meanwhile, though, anyone who defied the religious edicts of ESG and social justice and actually stayed invested in coal, has been doing well. Coal-producing companies like BHP Group PLC (LSE:BHP), Rio Tinto, and Glencore, as well as those with significant exposure like Anglo Pacific Group have been raking in the profits.


This month a new coal mining company, Bens Creek Group PLC (AIM:BEN), even managed to get a listing away on London’s Aim market, securing for itself a GBP35mln market capitalization in the process. Six months ago, no-one in their right mind would have predicted that there would be any more coal mining listings in London ever again.


But, strangely enough, money talks. And occasionally it still talks louder than the credit-scorers who tout the ESG world view. People would rather, it seems, be able to heat their homes today than feel good about buying into the tomorrow scenarios of the environmentalists.


After all, the environmentalists, in line with long-standing traditions of millenarianism, are quite likely to be wrong.


It’s a calculation the Chinese government seems more than happy to make, as it monkeys around in its own coal market while rapidly expanding output. And it’s a calculation that the world’s canniest investors will be making too.


The people who’ll get left behind: the ones who believe in ESG as a cure for all ills.

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