Coal Bandwagon Gaining Steam

Again, I am usually 5-6 months too early on every trend [click here for all posts related to coal], but it appears now people are waking up in the mainstream media...

• Coal, whose price surge has already outrun those of crude oil and natural gas, is generating an even louder buzz as a rash of bad weather has reduced its production globally.
• Citigroup earlier this week raised its forecast for thermal coal, saying it now expects prices for the benchmark product to double this year as blizzards in China, power outages in South Africa, and floods in Queensland cut into global output. Meanwhile, demand for coal keeps rising as the world's electricity use expands. Coal is poised to continue its rally as "tight markets are being further squeezed by new developments," Alan Heap, an analyst at Citigroup, wrote in a research note.
• Prices already have had a remarkable run. Thermal coal prices at Newcastle, Australia -- an Asian benchmark for coal used in power generation -- jumped 73% last year, beating crude oil as the best performing energy commodity.
• This year, coal futures trading on the New York Mercantile Exchange have gained 42% to nearly $80 a ton, a sharp contrast with oil futures' nearly 10% decline and a small rise for natural gas.
• Citigroup's Heap now sees coal futures reaching $100 per ton at the end of 2008, nearly double 2007's year-end price of about $56 a ton.
• The recent run-up in fuel prices means higher costs for consumers and industries heavily dependent on electricity. In China, which gets most of its electricity from coal, smaller metals manufacturers could go out of business due to higher electricity prices, analysts said. At the same time, higher traditional energy prices are likely to push China and other countries to pursue alternative energies to heavily-polluting coal.
• Over the past month, deadly snowstorms raging across China grounded the country's transportation system, cutting off coal supplies. Stalled freight trains brought the country's coal reserves to a short-term low. The current stock of coal for power generation is less than half of the normal amount, which is usually enough for 15 days of consumption, according to Minggao Shen, an analyst at Citigroup. More than 80% of China's power generation comes from burning coal, government data show.
• David Riedel, president of overseas-equity specialist Riedel Research Group, anticipates China will sharply increase coal imports in the coming months to build its reserves. Coal demand from China, the world's largest coal consumer, "will be very strong in February and March," said Riedel.
• China, a net coal importer, recently banned coal exports until March, a factor that could further push coal prices higher.
• Long-term demand for coal is also high. Demand growth from China is estimated 1.5 times above its GDP growth, which stood at 11.4% last year, Heap said.
• Those factors have pushed up the front-month coal futures contract to nearly $80 per ton Tuesday, up from $56 per ton at the end of last year. U.S.-traded coal futures are rising because the U.S. is shipping more coal to Europe, which has seen its coal imports from Africa and Australia disrupted, said Charlotte Wright, a coal analyst at Platts, a commodities information provider.
• "The recent power crisis has been triggered by short term influences, but a much deeper supply demand problem is underlying which is unlikely to be resolved until 2012 or so," said Citi's Heap.
• As a result of coal shortages and surging prices, the Chinese government last month ordered power restrictions in more than half of its provinces. China could see more power outages if the snowstorms linger and coal reserves remain low, analysts said.
• Recent disarray in coal supplies could also translate into long-term problems. On top of them, a lack of port and rail infrastructures is restricting supplies and the entry of new players worldwide.
• "These bottlenecks are most evident in Australia, but are also present in South Africa, Canada, Russia and China," Heap said. As a result, the long term growth trend on thermal coal demand is considerably higher than many other commodities.
• Besides power-generating coal, Citi also lifted its price prediction of coal used in steelmaking to $200 a ton in 2008, up from last year's $95.

I wrote about most of these coal trends in September 2007. Nice to see it all play out. As I've said lately, the coal market reminds me of fertilizer about a year ago. No one believed the rally, everyone said the stocks had run too much, it's a short term issue, and the stocks were destined to implode. They were wrong on fertilizer then, and I believe they are wrong on coal now. I find very few areas with great macro themes behind them, pricing power, and tremendous supply issues - coal and fertilizer are the main two.

Now the coal stocks, like the fertilizers, might go down 30% in a week, but it has nothing to do with fundamentals. Each time they dip, people will say this is the end of the run. I'll be buying. You can read above, we have issues into 2012. Just like we do in fertilizer. Capacity expansion takes a long time. We have bottlenecks everywhere throughout the supply chain. And countries are keeping coal inhouse as a World of Shortages continues to play out - expect more hording of natural resources over the coming decade.

The US exports very little nowadays. But one thing we have a bevy of is coal. We are the Saudi Arabia of coal. So we have our crops and our coal - 2 bright spots in an otherwise blighted service economy. Again an easy way for those new to the area is Market Vectors Coal ETF (KOL) [New Coal ETF (KOL) Introduced from Van Eck Global]. I have a bevy of coal names in my basket and am now even thinking of adding Arch Coal (ACI) - that should give me all 4 major public coal producers in the US, along with an ancillary play in Russia (Mechel (MTL)).

In an unrelated note, I do believe these shortages are the type of thing to really hurt some economies, esp. China. Along with the snow storms, this inability to get energy to the right places could dampen GDP. But it showcases the need for another of my big themes (of which the stocks have been punished of late).... infrastructure buildout. It all ties together folks - one big mosaic.

Long Peabody Energy, Consol Energy, Massey Energy, Mechel in fund; long Massey Energy, Consol Energy in personal account