China coal: a grimy outlook Coal miners and their shareholders love it when the weather gets hot enough to fry an egg on the pavement. China's recent heatwave is one reason shares of its biggest coal miners have jumped a fifth even as coal prices have slid by nearly a tenth. But there is little reason to think the gains are much more than a mirage. Heatstroke is understandable. Record temperatures in China have boosted energy use. At the peak of the heat earlier in August, power generation was 15 per cent higher than last year. Add to that a drought in the south: previous dry years have added about 3 per cent to coal demand to replace the fall in hydropower. The weather also comes at an opportune market moment: big miners" shares have halved in the past two years. More recently, options market activity suggests investors have cut back on bearish bets. That clears the way for a stock rally - but not, crucially, a coal price one. Spot prices have fallen a tenth since April in spite of stockpiling ahead of the summer heat. Supply, it would seem, already meets extreme demand even before factoring in new output from the fruits of the industry's huge two-year investment bonanza, now starting to come online. With benchmark prices of about Rmb550/tonne (a third off their 2011 average), up to two-fifths of supply is being produced below cash break-even in some regions, thinks Credit Suisse. In theory, those producers will cut output - which has indeed slipped. But the risk is that they sit burning cash and dumping that supply at the first sign of an upturn. Prices seem unlikely to rise. Yanzhou Coal this week typified the industry's issues when it said it had sold 7 per cent more coal in the first half but that revenues had fallen a tenth. It also conceded, according to an analyst translation, that it can no longer rely on more coal producing greater profits. Ain't that the truth.