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Wesfarmers’ coal outlook improves

The fall in coal prices over the past two years has played havoc with Australian coal miners; however there is hopefully some light at the end of the tunnel. Conglomerate Wesfarmers (ASX: WES), which has interests in two open-cut coal mines — the Curragh mine located in Queensland and the Bengalla mine in NSW — and other coal domestic coal miners stand to benefit from a proposed change in China’s energy policy.

The Chinese government is becoming increasingly concerned about air quality and environmental issues. A report in the Financial Times suggests a Chinese government proposal could see China ban the importation of low quality ‘dirty’ coal in an attempt to force coal-fired electricity generators to use ‘clean’ coal. Much of Australia’s coal is classified as high quality and should benefit from a policy move, primarily at the expense of Indonesia, which is the world’s largest coal exporter and also at the expense of Chinese domestic coal miners.

weschart

Source: Google Finance

Foolish takeaway

As the chart above highlights, exposure to a single commodity or a single mine can be very risky, as the performance of Whitehaven Coal (ASX: WHC) and Aquila Resources (ASX: AQA) compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) can attest. Owning a diversified portfolio of assets with numerous earnings streams, such as Wesfarmers, can protect an investor enormously.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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