Is a coal crash coming? BHP Billiton Limited and Rio Tinto Limited are selling coalmines

Posted on April 7, 2014 by Nanthakumar Victor Emmanuel, P.Eng Leave a comment

There’s increasing evidence that Chinese demand for commodities, especially thermal coal and iron ore, could slow in the next few years. Legendary short-seller Jim Chanos has made his opinions on China’s seemingly insatiable demand for iron ore and coal well known. Over the last 12 months or so he’s been proved correct, but few investors really understand why.

Put simply, China has been experiencing a boom in real estate construction. The reasons for this are varied, but include the fact that the Chinese leaders tend to aim for a certain rate of GDP growth, and fund the construction necessary to achieve that. This tendency is evident from the fact that net exports have been trending down as a percentage of GDP. The chart below shows Chinese exports of goods and services as a percentage of GDP, although if you believe Chanos’ numbers (regarding exports of goods alone from 2007 – 2013), then the trend is much clearer.