David Morgan is one of the world’s foremost experts on hard-assets investing, and he edits Independent Living‘s sister publication, Money, Metals, and Mining. We are honored to be his publisher and wanted to rush you some important new information about coal (it’s not as plentiful as you might think). The following article is adapted from the January 2011 issue.
As we begin to face a coal shortage at an alarmingly fast rate, Australian firms seem to be the companies to invest in, according to the mainstream. Their ability to produce enough coal for at least five years and maintaining control of the coking coal supply puts Australian companies near the top in this industry. These firms will be deciding the prices and quantities.
Investors would be smart to do a thorough analysis of any company before investing. But mark my words: major money will be made by smart investors in coal and related businesses.
As our readers (especially long-term subscribers) know, we look throughout the mining sector to find value. Money, Metals, and Mining is NOT a silver-only letter, although many who are not subscribers perceive us in that light. This is not to diminish the fact that most of our time and energy is devoted to the macroeconomic picture and the precious metals; but we have suggested copper, manganese, moly, uranium, lithium, and other types of resources for investment.
Price Shocks Coming: Time to Position Yourself Accordingly
Steel prices will rise as coking coal prices rise, leading to price increases in the automotive and construction industries. British automobile component manufacturers have already seen a 20% rise, and steel component suppliers with contracts to supply steel in the future will more than likely take a loss on those contracts.
Inside a Promising Coal ETF
Market Vectors Coal (KOL), a $389 million exchange-traded fund (ETF), holds shares of companies operating in the global coal industry. Its top holdings include Peabody Energy, Arch Coal, and China Coal Energy Company. KOL‘s portfolio is 52% foreign stocks, concentrated mainly in the China region and Australia. The ETF levies only a 0.59% annual expense ratio.
China is expected to enter a fight with Japan and South Korea for coking coal. Unfortunately for Japan and South Korea, China has a knack for cornering the markets, and last year Beijing’s cunning central planners sparked an increase in the nation’s coking coal imports by a factor of 12.
Coking coal will likely rise between 23% and 38%, and thermal coal will likely rise about 14%. In other words, steel prices will rise and energy costs will rise.
Coal shortages mean energy shortages for many countries. China put its customers on a rotation of blackouts to keep them supplied with heat last winter. India has been operating at a 10% annual shortfall and is predicted to have a 15% shortage in the next year and a half.
China’s ever-increasing demand for energy is translating into runaway demand for coal. The country is building on average one coal-fired plant a week. China burns three times as much coal as the United States and possesses only half the reserves!
China imports most of its coal from Australia, consuming 60% of that nation’s production. China is forecast to double its electrical production by 2018, which means it will consume all of Australia’s coal output. China could eventually demand the entire global production of coal.
The Takeaway for Investors
India uses coal for 70% of its energy as well; between India and China, our coal is quickly diminishing. In the United States, our two biggest power companies are running on debt, bringing them closer and closer to bankruptcy with the increasing coal prices.
The big picture is we are running out of enough coal to supply all the new users. Alternative energy sources need to be found, India needs to build the infrastructures to transport coal, and investors would be smart to invest in coal-producing companies that are nearby or export to China. Peabody Energy Corporation (BTU), the largest coal producer in the U.S., exports to China, Korea, and Chile.