The Oil and the Glory

Everyone’s investing in Chinese coal except… China?

Tell me what’s wrong with this picture: China burns half the six billion tons of coal consumed globally each year, a vast hunger that’s ignited a free-for-all among coal suppliers and dealmakers for a piece of the action, and pushed coal prices to a two-year high. In just one week this month, U.S. and European ...

China Photos/Getty Images
China Photos/Getty Images

Tell me what’s wrong with this picture: China burns half the six billion tons of coal consumed globally each year, a vast hunger that’s ignited a free-for-all among coal suppliers and dealmakers for a piece of the action, and pushed coal prices to a two-year high. In just one week this month, U.S. and European companies signed $15 billion in deals for coal properties, Javier Blas writes in the Financial Times. Going forward, the United States appears likely to be a special focus of such mergers-and-acquisitions attention, report the FT‘s Ed Crooks and Helen Thomas. Yet China is barely in the dealmaking — none of this new action involves Chinese companies. Blas quotes Melinda Moore of Credit Suisse on the topic: “I’m surprised that China has not had a greater presence in the latest round of M&A in coal, or at least not been financing more of the expansions.”

That is quite an understatement. How is one to interpret why the most aggressive resource-buying force on the planet — a country that derives most of its electricity from coal, and has a fixation on energy security verging on the paranoid — is lying low in a buying frenzy?

China is known for overpaying, such as the $3.1 billion it ponied up for half of Argentina’s Pan American Energy in March, or about 50 percent higher than the $2.1 billion at which Wood Mackenzie valued it. But until now, I have not heard of Chinese companies not trying really hard. It’s not that they are not in the mix at all — Chinese power-generation companies are planning on some big acquisitions from now until 2020, the Xinhua News Agency reports. But they are relatively market indifferent, and that doesn’t comport with our understanding of China’s economic strategy.

When you want to know what people are really thinking, look where they have skin in the game. So what is going on? One possibility is that China regards coal as a big requirement, but not a long-term  strategic hold. It could signal that, unlike the long-term bet on coal suggested by conventional wisdom, China intends to veer far more heavily into natural gas. Consider, for example, the $1 billion purchase by China National Overseas Oil Corp. of a one-third share of Chesapeake Energy’s Eagle Ford shale gas property.

As this blog has discussed previously, the Chinese Communist Party is not suicidal. For its political survival, it will look to curb the coal pollution that’s aggravating more and more Chinese, and more fully embrace the growing glut of natural gas washing up on its shores.

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