Two Coal ETFs Impacted By Australian Floods
Australia is currently witnessing the worst flooding that it has seen in over thirty years, causing many open pit coal mines and railway links to submerge having a major impact on coal supply.
The excessive rainfall and flooding has resulted in the closures of many of Australia’s businesses, with the most recent announcement of New Hope, the Sydney-listed thermal coal miner, announcing that it was suspending operations. In fact, the floods have influenced the operations of more than 40 coal mines throughout the nation and could impact more if Mother Nature doesn’t let up and the rainfall spreads to other parts of the country.
This inclimate weather is of such importance because Australia is the world’s largest exporter of coking coal, accounting for nearly one-third of global supply, which is a major component in steelmaking as well as the world’s second largest in thermal coal which is used in operating power plants for generation of electricity. According to Australia & New Zealand Bank, coal production in Queensland represents more than 40 percent of the world’s metallurgical coal exports and 8 percent of the world’s thermal coal exports, which is one of the hardest hit parts of Australia and is practically underwater.
As a result of these supply shocks, many Asian nations have turned to alternative coal suppliers to fulfill their obligations, which could put yet further strain on a sough after commodity. In fact, reports indicate that a South Korean utility recently purchased a cargo of South African coal to make up for lost Australian supply.
Although these supply shocks could be short-lived, it is equally important to consider the increased demand for coal that is likely to be seen. One major use for coal is power generation which is expected to witness surges in demand due to increasing population and increasing purchasing power in the developing world. According to the Energy Information Agency, nearly 40 percent of the world’s electricity is produced using coal and changes are not likely to be seen anytime soon due to the efficiency behind the commodity.
A second driver behind coal’s demand is its uses in steel making. Coal is used to produce nearly 70 percent of the world’s steel and as both, developed and developing markets continue to grow so will the demand for steel.
At the end of the day, demand for coal is not diminishing anytime soon and Mother Nature is taking its toll on supply giving the commodity positive price support.
From an investor’s perspective, the Market Vectors Coal ETF (KOL) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Stowe Coal Index. The Index provides exposure to publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. Top holdings include China Coal Energy, China Shenhua Energy Co. Ltd., Joy Global (JOYG), Consol Energy Inc. (CNX) and Peabody Energy Corp. (BTU). The Index allocates nearly 72% of its assets to companies involved in coal mining and production, 12% to those involved in coal mining equipment and 10% to coal power generators.
Another notable mention is the PowerShares Global Coal Portfolio ETF (PKOL), which is based on the NASDAQ OMX Global Coal Index. The Index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the exploration for, and mining of coal, as well as other related activities in the coal industry. Some of its top holdings include Cameco Corp. (CCJ), Coal & Allied Industries Ltd. and Alpha Natural Resources Inc. (ANR).
Disclosure: No Positions