When it comes to energy stocks, and particularly coal stocks, Wall Street continues to roll over in bed and hit the snooze button. Wall Street is so focused on the turmoil happening on their doorstep that they are ignoring what is going on in the rest of the world, particularly in emerging markets such as China.
China and other emerging economies have a large appetite for both thermal coal and coking coal. Coking coal is needed to produce steel which is in great demand for the many infrastructure projects currently taking place in China and other countries. Thermal coal is in high demand globally because it is used in power plants to produce electricity.
The prices for coal have doubled and tripled in the past few years. Why? One of the main reasons is simply supply shortages. China and India are quickly turning from major exporters of coal to being net importers of coal. The globe’s major coal exporting nations such as Australia and South Africa are having problems meeting the demand for coal.
In Australia, the major problem has been their infrastructure. The country’s major coal export harbor in Newcastle was built years ago and simply cannot handle the number of ships that wish to be loaded with Australian coal. Currently, there are still about 30 ships waiting to be loaded at Newcastle. Many of these ships have been waiting for months.
In South Africa, it’s a different problem. There the problem is power. The fast-growing country just does not have sufficient electricity generated from their power plants to power the energy-intensive mining industry. Many mining companies have had to resort to supplying their own generators to keep their mines operating.
The dots continue to connect around the globe. Europe also needs coal and they usually get a large amount of their coal from South Africa. Unfortunately, the coal that South Africa does manage to produce is being shipped to China because the Chinese are willing to pay more for the coal than the Europeans.
This has led the Europeans to begin purchasing large amounts of coal from the US. The demand in the US is also increasing, with more coal-fired power plants being built and brought online. This increased demand has pushed up US coal prices in line with other global coal prices. The United States, of course, does have the largest coal reserves in the world.
US coal mining companies stand to benefit greatly from the global macro trends. Yet, Wall Street continues to ignore these trends. Many coal mining stocks are down 40% or more from their peaks earlier this year. This has led to some takeover activity such as Cleveland Cliff’s (CLF) attempted takeover of Alpha Natural Resources (ANR). Rail companies, which transport coal, also stand to benefit.
There are a number of companies investors can look at to take advantage of these trends. These companies would include: Peabody Energy (BTU), Arch Coal (ACI), Burlington Northern (BNI), and Bucyrus International (BUCY). Investors can also purchase an ETF – the MarketVectors Coal ETF (KOL) – which offers a basket of companies involved in coal in one easy-to-buy security.
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