2014 Chinese Steel and Coal Demand Is Not What You Think It Is: A Wall Street Transcript Interview with Zhao Hu, an Equity Analyst for Morningstar, Covering Asia Pacific Basic Materials and Energy Companies

67 WALL STREET, New York - April 17, 2014 - The Wall Street Transcript has just published its Metals & Mining Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Mining Safety and Environmental Concerns - Global Iron Ore Production - Emerging Market Infrastructure Construction - Chinese Demand for Industrial Metals - Zinc Supply Deficit - Demand Growth in Zinc - Accelerated Grid Spending in China - Copper Demand in China

Companies include: Jiangxi Copper Company Limited (0358.HK), Zijin Mining Group Co. Ltd. (2899.HK), China Coal Energy Company Limited (1898.HK), China Shenhua Energy Co. Ltd. (1088.HK), Anhui Conch Cement Co. Ltd. (0914.HK), Baoshan Iron and Steel (600019.SS) and many others.

In the following excerpt from the Metals & Mining Report, an expert analyst in the Chinese materials markets discusses the outlook for the sector for investors:

TTWST: What are some of the big trends in the Chinese coal industry that investors in that sector should be aware of this year?

Mr. Hu: I think there are a couple of big trends. Number one, from a demand side I think investors should probably pay attention to how the Chinese real estate construction as well as its energy-intensive economy is heading, because energy intensity dictates demand for coal, especially thermal coal, and China consumes about 50% of world's thermal coal. So that being said, if China's economy started to slow and economic growth moves from the investment-led model to a consumption-driven model, we would see coal demand as well as electricity intensity coming down. That would definitely hurt the overall demand for coal as well as the seaborne imports from Australia as well as Indonesia.

From the supply side, I think there are two stories developing here. One is the de-bottlenecking of a rail capacity in China. So the majority of the coal, I would say 90% of the thermal coal in China, travels through rail. And because of where the coal is - it's far away from where the coal is being consumed - a lot of the coal is trapped in an area where they can only travel through rail. But the problem in the past has been the rail capacity has not been able to meet the demand of the coal production, so a lot of investments have been spent in the past two years in expanding this capacity. But since coal demand growth has been coming down and this railway capacity growth has been going up, we'll probably see railway capacity actually catch up with coal production and coal demand this year. We could even see excess rail capacity next year.

What that does is enable the low-cost rail network to bring a lot more cheaper coal from the remote parts of China to the coast. As a result, supply of the coal would increase and because the incremental tonnage being transported via rail is actually cheaper to mine, we expect this coal supply to weigh on the supply curve and squeeze out the expensive marginal producer and put pressures on the coal prices in the latter half of this year. So these two trends both are bearish for coal. That's why we are not optimistic for coal prices going forward.

TWST: China Shenhua is one that you think is well-positioned to weather a weaker coal market. Why is that?

Mr. Hu: China Shenhua (1088.HK) is a little bit different than the other pure-play coal companies we cover primarily because of its vertical integration strategy. The company recognized the coal sector's volatility and is able to expand upward and downward into different sectors that include railway transportation, power generation as well as some shipping and port operations, so it covers the entire supply chain of producing the coal, shipping the coal and also generating electricity from coal.

So the company's earnings are only 50% leveraged to coal...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.