Why Coal Is Worthy

By Kevin Grewal

Over the past year coal has risen to exceptional levels as populations and economies around the world grew and both microeconomic and macroeconomic factors suggest that the commodity will likely continue to remain hot.

China

In the coming year, China is expected to be a net importer of coal.  This phenomenon in the Asian nation is two-fold.  From a demand perspective, China continues to grow and therefore demands more coal, to generate electricity and fuel its power plants.  From a supply perspective, China has been known to be the largest coal producer in the world, however, the nation in the middle of a major consolidation of its coal industry which is restricting supply.  Additionally, unseasonably cold weather has increased the energy demand for home heating.  Therefore, demand for coal in China will likely far outweigh supply.   

India

As India continues to grow, infrastructure is expected to play a pivotal role in both government spending as well as GDP growth.  This growth emphasis in conjunction with the government’s plans to add additional power generating facilities is likely to spur demand for coal.  Granted, India has a domestic supply of coal, but the quality of this coal is poor and results in major logistical problems.  As a result, India is likely to be a huge importer of global seaborne thermal coal. 

United States

As the United States emerges out of the recession and manufacturing starts to churn, steel mills have started firing up.  In fact, steel utilization rates are up about 20% from their lows and are expected to continue to rise, further increasing demand for the charcoal commodity.  Although supply and demand are not likely to be much of an issue in the U.S., the Asia-Pacific is likely to absorb much of the demand destruction in the U.S.

Much like the weather conditions that are being seen in China, exceptionally cold weather in the Northeast is driving demand for home heating.

 

At the end of the day, coal is still one of the cheapest and most effective ways to generate energy and will continue to be the main source of global energy and there just enough of it to go around.  Some ways to take advantage of these factors include:

  • The Market Vectors Coal ETF (KOL) which closed at $39.45 on Tuesday
  • The PowerShares Global Coal ETF (PKOL) which closed at $31.45 on Tuesday

When in vesting in these equities, it is important to consider factors that could potentially hinder the price of coal like a hiccup in an economic recovery.   A good to way to protect against these factors as well as the inherent risks involved with investing in equities, is through the use and implementation if an exit strategy which triggers price points at which an upward trend in gold could potentially be coming to an end. 

According to the latest data at www.SmartStops.net, the price points of the aforementioned ETFs are: KOL at $38.62 and PKOL at $30.79.  These price points are updated on a daily basis and are reflective of market volatility and conditions.

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