Tony Daltorio, Investment U Research

China has an environmental problem, something the government has known about it for years.

For some time now, polluters have dumped massive amounts of toxic waste into China’s air and water. And since Beijing mandated economic growth at all costs, those emissions of toxic waste have remained unchecked with no repercussions whatsoever.

At least nobody checked it before. That’s all changing though, thanks to the up-and-coming environmental movement infiltrating the country… a small minority that still has some part of the central government’s ear, as evidenced by their recent efforts to crack down on some of the worst polluters.

Starting in late 2008, Beijing began a concentrated effort against numerous illegal and dangerous coalmines – which emitted significant amounts of pollution – shutting down many of them for good.

In addition, the government has also begun an industry-wide crackdown on lead smelters following a suspicious number of lead poisoning cases among the populace in surrounding areas.

So far, that means a permanent decrease in lead smelting capacity, to the tune of approximately 400,000 tons or 5 percent of global production.

If you’re thinking, “So what?” You’re not alone. But these actions have serious investment implications. Shutting down these facilities means that China can’t sustain elevated levels of commodities production the way it used to.

So instead of shrugging off the news, investors should instead take a serious look at what it could mean to their bottom line.

Supply and Demand

In the commodities market, it usually comes down to a simple case of supply and demand, and this time is no different. The Chinese government has reduced the supply of both coal and lead in China through its actions, while the demand hasn’t changed a bit.

If you guess that led to increased prices for both products, then you guessed correctly.

Since the drop in Chinese output, coal prices have jumped to their highest in a year, forcing the country to greatly increase import of the commodity.

• Imports of coking coal – which is more rare and expensive, and preferred by steel-makers – rose to 12.6 million tons in the first half of 2009, up from 1.1 million tons in the same period last year.
• Imports of thermal coal – favored by power plants – amounted to 24 million tons during the same period, as compared to exports of 4 million tons in the first half of 2008.

In addition…

• Spot prices for coking coal recently surged to $160 a ton, up nearly 40% in three months and a high for the last 12. (That trumps the price of annual contracts for 2009-2019 by 25%)
• Thermal coal spot prices recently shot to 75% a ton, up 25% from the March low of $60, though still well below last year’s record of over $180 a ton.)

The increased demand caught many coal miners off guard, since they had already braced for a prolonged period of low prices due to low demand from traditional buyers in Japan and South Korea. But thanks to simultaneous moves in Asia, they got just the opposite. American-based Consol Energy even shipped its first cargo of US coking coal to China in five years!

Five Ways for Investors in China to Profit

China is the world’s largest producer and consumer of lead. So when it shut down the smelters, it upset a market already finely balanced between supply and demand.

With global inventories of lead relatively low already, that move sent lead prices higher than they’ve been for a year. Just take the London Metal Exchange, where lead surged over $2,2000 a ton… up nearly 130% from $980 in January.

If China continues listening to its green movement, it will likely have to import even more when the seasonal upswing in consumption gets underway, potentially forcing prices even higher.

Naturally, with a shift like this, we’ve got a good spread of profitable choices…

• Play 1: iPath Dow Jones – UBS Lead ETN (NYSE: LD), an exchange-traded note that stands as the only pure play on the price of lead.
• Plays 2&3: Van Eck Market Vectors Coal ETF (NYSE: KOL) and Invesco PowerShares Global Coal ETF (NASDAQ: PKOL), two broad-based Exchange-Traded Funds that focus on the global coal industry and have 34 and 31 constituents respectively.
• Plays 4&5: BHP Billiton ADR (NYSE: BHP) and Rio Tinto ADR (NYSE: RTP), two of the large global miners that produce coal and lead.

Good investing,

Tony Daltorio

View original at: Investment Advice and Investment Research with a Contrarian Point of View

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