China Is Changing Its Coal Use, and It Affects the Whole World

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, we've been talking quite a bit about supply chains.

Joe Weisenthal (0:22)

That's correct. For now, like pretty much like well over a year, but yes, absolutely.

Tracy Alloway (0:27)

Yeah.

Joe Weisenthal (0:27)

It's not going away.

Tracy Alloway (0:28)

Yeah, that's probably an understatement. So one of the things we have definitely learned over the past year or so is that when one part of the global supply chain, I guess, flaps its wings or experiences a disruption or whatever, it tends to ripple through a bunch of other things. And I think that's arguably what we've seen with energy prices and with the big surge in prices over the past few months.

Joe Weisenthal (0:53)

Yeah, I think like commodities, and of course commodities are very sort of hard. You can't de-link them from global industrial processes and supply chains in general. Like it feels like when we talk commodities, that it's like A, there is a very high level of demand. The GDP around the world growing very fast, particularly as economies return to trend, or in some cases, maybe even overshoot the previous trend.

And then there is also these sort of idiosyncratic factors that pop up that are not really macro. Maybe it's related to weather. Maybe it's related to environmental changes that inhibit production. Maybe it's something else.

And it's like that policy. So it's like that combination of very tight, very strong demand. And then any ripple or any speed bump anywhere or any change on the supply side really gets magnified.

Tracy Alloway (1:43)

Yeah. So this was something that Jeff Curry at Goldman Sachs brought up on one of our episodes last year when we were discussing high energy prices and the commodities rally.

He, I think he said that actually what was happening in European gas actually began with a coal shortage in China. So there wasn't enough coal in China and they had to find a substitute energy source and what they found was oil and gas and that eventually fed through into European prices. So I guess what I'm saying is, if you think of China coal as ground zero for higher energy prices that rippled throughout the world, it seems like we should dig into that.

Joe Weisenthal (2:26)

Yes. I'm very curious what's going on with China and energy because there's lots of different things happening at once. There's the Olympics coming up. There's domestic policy changes, which we've talked about quite a bit.

There's long-term goals on changing the energy mix. I don't feel like I have much insight into it other than that is extremely important beyond China's borders. So yes, we need to dig in further.

Tracy Alloway (2:52)

Well, I am pleased to say that we are going to do exactly that. We have Alex Turnbull, a fund manager based in Singapore and someone who has done quite a bit of research into China's coal market. So Alex, welcome to the show.

Alex Turnbull (3:05)

Thank you very much.

Tracy Alloway (3:08)

So I guess my first question, just to lay the groundwork for this discussion, one of the unusual things about the China coal market, as I understand it, is that China does actually have a decent amount of coal within its borders, but it also imports a lot of its coal supplies. So I guess my question is, why does that happen?

Why do they do that? Why not just dig up what they have already?

Alex Turnbull (3:34)

Sure. With any commodity, which is reasonably low dollar value per ton, it's best to think of it as not a price where if you want to buy an ounce of gold from someone, it's sufficiently high value, they can mail it to you or export it quite easily. With things that are relatively low value per ton, transport costs are incredibly important and locational constraints are very important. So it's a little bit like gas pipelines where just because someone wants to buy gas somewhere doesn't mean you can actually deliver it to them or deliver it to them at an economical price.

So with coal, it's really these locational dynamics that make it quite a quirky market in some respects.

Joe Weisenthal (4:17)

Just like 90 seconds into this discussion, I'm already finding that to be like very useful. So I want to step back and ask even zoom out even further before we get into the details. But it's in your research, like outside of China specifically, why is this a question or why is this a topic that interests you? And why should say anyone outside of China care that much?