Chinese rail capacity hurting coal profits

U.S. China Mining Group (SGZH, quote) reported solid profits of $7 million on $54 million in sales today. The Chinese coal mining company brought up concerns about China’s railway system, however, noting that some sales decisions were based on who could move the coal instead of who could pay the most for it.

Congested railways are threatening the growth of coal producers like US China Mining Group.

According to CEO Hongwen Li, U.S. China Mining in 2011 “produced more, brokered less, and had fewer customers. The tightened capacity for coal transportation by rail was one of the main reasons for our increased efforts in selling more coal extracted from our mines to certain customers who were able to book railway cargoes for delivery during 2011.”

China has been pursuing an ambitious railway development program, and BCA Research says the nation’s total track length has increased 50% since 1995. Railway usage is up even more, though, with passenger traffic doubling and freight increasing by 150%.

Until recently, railway building has been keeping up with the growing demand. Approvals for new railway projects were reduced in 2011, however, then halted completely as concerns rose about railway safety and China’s overheating economy. 

According to JP Morgan, China is now pushing forward with railway developments again, encouraging developers with cash and tax benefits. However, it may take some time to get the engine moving.

Investors should be on the lookout for companies like SGZH whose growth is being limited by lack of railway capacity. They may also want to keep an eye on Chinese railroad developers like the China Railway Construction Corp., which has been gaining on the Chinese exchanges after reporting profits March 30. China Railway does not trade in the U.S., but is a small part of the Guggenheim China Small Cap Index ETF (HAO, quote) and other exchange traded funds.


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