On a recent trip to Indonesia, small talk with my taxi driver led to an interesting proposal: an offer to buy a coal mining license. I wasn’t in the market for one but it just goes to show how much Indonesia’s coal mining industry has grown in recent years. The country’s rapid and significant development in this area has been due partly to privatization efforts, but more so to a sharp uptick in demand from countries like China. Nearly 80% of the output from Indonesian mining firms is exported, with China as the largest individual importer. 

China boasts the world’s third-largest coal reserves (after the U.S. and Russia) and its coal quality (as measured by heat content) is not necessarily any worse than that of Indonesian coal. So why would China seek to import so much coal from Indonesia? One key factor is that a large portion of China’s reserves are located in remote areas such as Xinjiang Province or Inner Mongolia, and logistics tend to be difficult to send resources from these reaches to China’s more developed eastern areas where demand is strong. Most Indonesian mines, on the other hand, are situated near shipping ports, and coal can therefore be transported rather easily and cost-effectively to China’s coasts.

China’s reliance on coal has actually declined from its levels in the 1950s when the resource was virtually the country’s sole source of energy. Last year coal supplied about 70% of China's energy consumption as the country has made efforts to diversify its energy supplies with sources such as crude oil, natural gas and hydroelectric. Moreover, when I visited Xinjiang three months ago to tour a large open-pit thermal coal mine, I noticed the construction of power plants and the development of many electricity-consuming heavy industries. As China continues to develop its inland roads and railways, logistics should eventually pose fewer problems for production and delivery. But with alternative sources of energy on the rise, China’s dependency on coal imports may decline even before its transportation bottlenecks are resolved.

As I considered the offer to buy an Indonesian mining license, it seemed clear to me that Indonesia’s coal producers should continue to diversify their customer base, and perhaps invest in other areas including power production in order to maintain more robust and viable businesses.

 

You should consider the investment objectives, risks, charges and expenses of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained in the prospectus, which may also be obtained by calling 800.789.ASIA (2742). Please read the prospectus carefully before you invest or send money as it explains the risks associated with investing in international and emerging markets. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.

The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.

Matthews Asia Funds are distributed in the United States by Foreside Funds Distributors LLC
Matthews Asia Funds are distributed in Latin America by HMC Partners

© 2012 Matthews International Capital Management, LLC. Matthews Asia^® is a registered trademark of Matthews International Capital Management, LLC.

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