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China's Coal Miner Merges With Utility Giant: ETFs in Focus

Zacks Equity Research
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The Chinese government has approved a merger between coal miner, Shenhua Energy, and electricity producer, Guodian Corp. This merger will create the world’s largest power company by capacity (read: Trump Takes First Step Toward Trade War? ETFs to be Impacted).


Per Bloomberg data, the merged companies will have assets to the tune of $271 billion and power capacity of more than 225 gigawatts. With this merger, China aims to tackle its inefficient state-owned enterprises and battle the debt burden. Most recently, Shenhua reported its best interim results in four years. Moreover, this merger is expected to spur other deal-making activities in the industry (read: China Economic Data Disappoints: ETFs in Focus).


Given China’s stand in global coal consumption, this deal is expected to impact international coal trade. China accounts for almost half of global coal production and consumption.


Shenhua accounts for a large portion of the total coal production in China. Per Reuters, it accounted for 8% of the entire country’s production. Given its large size, it plays a major role in determining coal price in the country. Although the company presently sells more coal externally, the scenario is expected to change once the merger is complete.


Moreover, now that internal customers will take a larger share of the total production pie than external customers, the merged company might look at selling its higher quality products to external customers both domestically and internationally.


Not only will this merger help Guodian reduce its cost of raw materials, it will also give the company access to rail infrastructure and other resources of the giant coal miner. This deal has raised concerns among other utility companies, which generally buy from Shenhua, as these companies are concerned that Shenhua will favor Guodian over them when it comes to supplying coal.


Therefore, smaller utilities companies might have to look for other suppliers and purchase coal at a price higher than they currently pay in order to avoid supply shortages in winter.


Let us now discuss a few ETFs focused on providing exposure to natural resources (see all Energy ETFs here).


VanEck Vectors Coal ETF KOL


This fund seeks to provide exposure to the price of coal and performance of companies in the global coal industry.


It has AUM of $95.8 million and charges a fee of 59 basis points a year. From a sector look, Energy, Materials and Industrials are the three allocations of the fund, with 71.6%, 18.5% and 9.9% exposure, respectively (as of July 31, 2017). From a geographical look, China, United States and Australia take the top three spots, with 23.28%, 21.56% and 15.18% exposure, respectively (as of July 31, 2017). Teck Resources Ltd, China Shenhua Energy Co Ltd and United Tractors Tbk Pt are the top three holdings of this fund, with 9.83%, 6.71% and 6.25% exposure, respectively (as of August 29, 2017). The fund has returned 23.49% year to date and 44.60% in the last one year (as of August 29, 2017). It currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook.


IQ Global Resources ETF GRES


This fund seeks to provide exposure to companies in the global commodities industry.


It has AUM of $187.3 million and charges a fee of 78 basis points a year. From a sector look, Livestock, Precious Metals and Energy are the three allocations of the fund, with 20.73%, 19.92% and 14.62% exposure, respectively (as of June 30, 2017). From a geographical look, United States, Hong Kong and Canada take the top three spots, with 31.43%, 15.32% and 14.33% exposure, respectively (as of June 30, 2017). China Shenhua Energy Co Ltd, Tyson Foods Inc and Hormel Foods Corp are the top three holdings of this fund, with 7.51%, 6.04% and 4.97% exposure, respectively (as of June 30, 2017). The fund has returned 5.38% year to date and 2.34% in the last one year (as of August 29, 2017).


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VANECK-COAL (KOL): ETF Research Reports
 
IQ-GLOBAL RES (GRES): ETF Research Reports
 
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