Published On: Mon, Feb 11th, 2013

Coal is Rising from Temperature Falling in China and India

China and India are experiencing the coldest winter in decades.  This is very bullish for the price of coal, which is the primary energy source in each country.  The lower the temperature goes in India and China, the higher rises the price of coal.

China uses more coal than any other nation in the world.  About 80% of the electricity is China is generated by coal-powered plants.   As the chart below shows, China uses almost as much coal as the rest of the world combined.  The rate of coal consumption in China is soaring, too.  That will only continue as the economy in China continues to rebound.

graph showing china coal consumption vs the world

It is much the same story in India. 

There is a tremendous shortage of electricity in India.  Coal-fired utilities are the most expeditious and least expensive ways to produce electricity quickly.  Overall, the International Energy Agency predicts that coal will surpass oil as the most widely used energy source in the world by 2017.  Natural gas will not even be close to coal is usage around the world, according to the report. This is due to countries needing three sets pipelines to take natural gas from the ground to the home or business.

By contrast, coal can be pushed in a cart to be used for heating or cooking.  Natural gas is the fuel for a developed country.  The pipeline networks in India and China are but a small fraction the size of that in North America. As a result, the record cold this winter in India and China has increased the demand for coal.

Over the last quarter, the period measuring the winter in India and China, the price for the exchange traded fund for coal, Market Vectors Coal (NYSE:KOL), has risen by 2.18%.  By contrast, the price for the exchange traded fund natural gas, United States Natural Gas (NYSE: UNG), has fallen by 14.72%. This should continue as China’s national temperature for this winter has been 25 degrees, the coldest season in 28 years.  For northeast China, it has been the most frigid winter in 43 years.  In India, New Delhi just endured its coldest day in 43 years.  To heat the buildings in these countries and others results in a huge demand for coal. What this also results in alternative energy being less appealing.

Cold weather greatly reduces the attractiveness of solar power.   The solar panels do not require warm weather, but sunlight is needed.  The shorter days of winter with snow degrade the effectiveness of solar power and wind turbines. That increases the appeal of coal.  The ease of use for coal will have it as the fuel source of choice for China, India and other countries well in the future.  Extreme weather will just increase the demand.

While more heat is needed in the winter, warm weather results in the need for more electricity to provide air conditioning.  For that, coal is needed in greater quantities by power plants.  Coal has a bright future, no matter the weather outlook!

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.