Forget about iron ore. It’s old news.
The global explosion in demand for that commodity and the huge 80% to 100% price increase that has resulted as demand outstripped supply and in the price of stocks such as Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RTP.)
The new story, and one you can still catch, is thermal coal. You know the black lumps of carbon that the world burns to produce electricity (and lots and lots of greenhouse gases.)
The catalyst, as it was with iron ore, is China. China became a net importer of thermal coal in 2009 for the first time. Last year China bought about 80 million metric tons of coal from overseas producers. That’s a huge turnaround from 2005 when the country exported 70 metric tons.
But China isn’t the only big demand-side story.
The demand for imports of thermal coal from the Indian economy is growing like an uncontained boiler explosion. India imported 70 million metric tons of coal in the fiscal 2010 year that ended on March 31. That’s double India’s imports in fiscal 2009.
Recent negotiations between thermal coal producers and Japanese utilities have set benchmark prices for the fiscal 2011 year that started on April 1, 2010 about 40% above last year’s annual contract price. The price of thermal coal on the Australian market hit a low of $61 in March 2008. The new annual contract, with prices of $98 to $104 a ton, is above spot prices of $95 a ton. When the price of a commodity on an annual contract is above the current spot market price, you can bet that customers are worried that prices are headed higher.
How much higher and for how long are key questions for investors who don’t want to buy into the shares of thermal coal producers if this upward trend in coal prices is near an end.
I’d say, however, that coal prices have at least another two years to run before supply has any shot at catching up with demand. In February Credit Suisse raised its estimates for thermal coal by 13% for 2010 and another 13% for 2011 on rising demand from India and China and infrastructure bottlenecks that would keep exporters from meeting demand. (The need to handle rising volumes of coal is one reason that China has been investing so heavily in its rail system.) A lack of road and railroad infrastructure prevents the Indian coal mining industry from meeting demand. Coal shortages resulted in power generation growing by just 5.45% in 2009 instead of the planned 6.5%, according to the Indian government.
Now that China has become a net importer of thermal coal, the country has begun aggressively scouting the world to line up supply. The country recent made its first buy ever of coal from Columbia, for example. (Don’t expect China’s overseas activities in the coal market to reach the frenzy that we’ve seen in iron ore and other commodities. China is largely self-sufficient in coal and could probably met demand from domestic sources except that China’s government has decided to consolidate or shut down many of its smaller mines in order to reduce the appalling rate of death and injury in China’s coal mining industry. In 2009 2,631 miners—or 7.2 a day–died in China’s coal mines according to the State Administration of Coal Mine Safety. The death total in the U.S. coal industry was 34 in 2009. 29 miners died in last week’s Upper Big Branch coal mine in West Virginia.)
But the biggest sources of thermal coal for the Chinese, Indian, and Japanese markets will be producers in Australia and Indonesia. Those countries are the global suppliers nearest to customers—so they gain an advantage from lower shipping costs—and they are two best placed to increase production in 2010 and 2011.
So what stocks do you buy to take advantage of this trend in thermal coal?
One from Indonesia, one from Switzerland with big mines in Australia and South Africa, and one from the United States with big plans to become an international player.
Indonesia is the world’s largest producer of thermal coal for export. In 2009 Australia produced 141 million metric tons but Indonesia produced 201 million tons. Most Indonesia coal travels by river rather than rail and that has helped the country avoid the internal transportation bottlenecks that have plagued other producers. But exports are still limited by a shortage of terminals for loading ocean-going carriers. Only three of the eight are big enough to handle the largest bulk carriers.
PT Bumi Resources is the largest Indonesian coal producer. The company produced 50 million metric tons in 2009. Unfortunately, the stock trades only on the Jakarta exchange (BUMI). The shares are extremely volatile now: The company is planning a sale of its non-coal assets to raise capital to pay down debt and while the market approves of this use goal, it’s not sure that the price that Bumi Resources is asking is high enough. If you can find a broker who can buy this for you, see if you can catch it on a down day—or just wait until the volatility is lower.
Xstrata (XSRAY—ADR) is the second largest coal producer in Australia. (It’s also a major producer in South Africa and Columbia. September 2009 production of 11 million tons trailed only BHP Billiton’s 18 million. But I have a slight preference for Xstrata over BHP Billiton because the Swiss company seems to have put thermal coal higher up its list of corporate priorities. And since Xstrata doesn’t have the iron ore profile of a BHP Billiton, (and it isn’t an Australian stock to most investors) its share price hasn’t galloped quite so far ahead of the market.
Peabody Energy (BTU) isn’t just a U.S. coal company any more. In 2006 it snapped up Excel for $1.5 billion, tripling its Australian coal assets in one move. The company clearly hasn’t finished. It’s a bidder in the war to acquire Australia’s Macarthur Coal (MACDY). And the company is in talks with Coal India that would expand Peabody’s presence in the Indian market and give Coal India a stake in four of Peabody’s Australian mines. Again, because Peabody Energy isn’t either an Australian stock or an iron-ore miner the stock hasn’t run up significantly. It trades at 28 times trailing 12-month earnings per share but at just 11 times projected forward earnings per share.
If you’ve got some patience, Peabody offers the most upside, I think. If you’ve got patience and a way to buy on the Indonesian market PT Bumi Resources is the best long-term story.
Full disclosure: I own shares of Vale in my personal portfolio.
Like some of you, I am pessimistic on the prospects of my ability to do anything to help stop the destruction of our environment. However, Shameus is right, that’s not an excuse not to try. I’ll be passing on any investment that seeks to profit from the coal industry, no matter how financially promising the prospects.
What is the definition of Thermal Coal. What makes it different from other types of coal and what are the other types of coal?
Just another side thought to this topic. Anyone know the quality of the coal coming out of other countries besides the US? Coal as a limited resource is very similar to crude oil. Just like “peak oil” you also have “peak coal”. In the US we have exhausted our supply of high quality coal. Most of that was used during our industrial revolution. The quality of the coal or the BTU produced from today’s US supplies is much lower. Meaning you have to use more to get the energy output you need and consequentially more pollution. I agree with the comments above. It is not a sustainable resource. But neither is tar sands and we are mining that like crazy.
Any thoughts on Westshore Terminals (WTSHF), the largest coal export terminal on the North American west coast, as a possible play on China’s increasing coal needs?
All, I think blaming greed for enviornmental destruction is partly incorrect, just as it is partly incorrect when greed is blamed for the crash of the banking sector–as if you can identify that last million dollars as the bit that made the banker greedy. Such devastation derives not from the immorality of a few investors or a few bad managers (though undoubtedly many are immoral). Rather the problem is a system of finance that by its definition looks to maximize shareholder profit, regardless of the external costs to society or the nation in general. Corporations (and the investors they represent and reward) increasingly acquire the rights of citizens (free speech and so on), but they face none of the costs that citizens face for actions that would put people in prison (blowing up a mountain, poisoning water supplies etc.) Like other posters here, I think we need to expose as dangerous the narratives that financial interests of a corporation benefit us all, or, say, that the invisible hand of the market place works. Remember in the paragraph where A.Smith coined that phrase–the invisible hand–he was addressing concerns that businesses would invest in foreign trade rather than in domestic industry (put profits over the interests of their nation). He argued that businessmen would naturally prefer to invest in domestic industry over foreign industry in order to keep his eye on their investment, aligning their interests unconsciously with the nation–as if an invisible hand. Today, that logic no longer holds–who needs to see production at home before investing?–yet people still trot out that phrase as if it can guarantee the benefit it promises. When business interests no longer align with national (or even planetary interests) we ought to first strip back the ideological foolishness that threatens us all whenever it shows up in the media, second, try to persuade the lobbied ears of our politicians to put national interests ahead of their own re-election coffers and corporate interests, and third, refrain from the illusion that you can invest without moral entanglement or culpability for what the company does in your name. It might be difficult to disentangle ourselves completely from the abuses of a global system of finance, but that’s not an excuse not to try.
I agree that BTU is the best option. They are large, so growth won’t be as rapid as another company could achieve, but the tradeoff is stability. I’ve like their balance sheet and management the best out of the American’s. Plus, they are the best leveraged to the high dollar, high profit met coal IMO.
Sounds like the bulk carriers might be primary beneficiaries of this increased demand, and one doesn’t have to worry so much about picking the right country/supplier. Except for the reference above to Mongolia, all the rest of this potential supply is going to move by bulk carriers. Let’s just hope they can stay off the Barrier Reef! Idiots — it’s not like those are uncharted waters.
I believe that mankind is doomed to be the cause of its own distruction. We are the only species on earth that consciously defiles its enviroment to the point of making vast areas unihabitable. This has nothing to do with whether global warming is scientific fact or not. Look at the destruction of the fish stocks in the oceans. Look at the destruction of the ozone layer. Look at the developing global crisis in potable water. You don’t have to go to Indonesia to see the massive enviromental destruction of coal mining. Go to West Virginia where the latest technology involves ripping off the top of mountains to expose the coal underneath. The underlying cause of this destruction? Mankind’s insatiable greed. I don’t know if it is too late or not. But as I read the self serving comments here defending the indefensible, it just confirms my fear.
Another good pick Jim. I’ve owned this stock for a few years now and it’s been very good to me.
I appreciate the comments above regarding pollution and environmental destruction, but I have a slightly different approach, as an investor. While I support, and have written to legislators regarding this issue, I doubt that will do anything. So, I take the same approach I have with the tobacco industry….if I can turn a profit, I will.
Jim,
I like the play, but not the specific companies. The PowerShares Global Coal ETF (PKOL) looks like the best play on coal to me. Although I wouldn’t pay more than $30 for it.
The sentiment “this Business is going thrive with or without us so why not let’s jump in and make profits” is an excuse for people pretending to care about moral things. Either jump in for the love of money or stay out on moral grounds. Rest is all bs talk.
Mongolian Coal is about to boom into China.
See Hunnu Coal on the ASX : HUN
The coal industry in Australia is forging ahead at the moment, with 50 ships out of Newcastle port waiting to be filled, and big orders over the next 2 years.
Another new Australian coal explorer with vast resources about to be announced is Stanmore Coal ASX : SMR
Jim,
What about an ETF play such as KOL or PKOL?
To All,
I appreciate the sentiment…coal is nasty business, but it is going to continue to be business with or without us. Want to make a change? Write your representatives and tell them to support legislation to fine any company 10 million per employee death. That is what it is going to take if you want the CEO’s to come out of the safety arm of the company instead of the production arm.
Travel makes you wiser; but less happy (Thomas Jefferson). I was a field service engineer during the 90s, and traveled the world. I had the chance to work in Indonesia at a coal mine. All I remember was the coughing, burning in my lungs, and the slimy feel/taste in my mouth. The destruction around was shocking. I will also sit this one out.
Same goes for unsustainable logging (worked in a project in Borneo – Indonesia); and Monsanto.
I feel like a ghoul here as an owner of MEE. Another stock I have done well with, and a former Jubak pick, is JOYG. I’m not sure if UNP, a current Jubak pick, fits into this area.
Any thoughts on ANR as a player in this, instead of, or in addiition to, BTU??? Thanks for reply.
Great comments “tostoryteller”, I couldn’t agree more with you! I’m involved with a national group that is fighting to end our dependence on coal since it is the number one pollutant in our country, releases mercury which has been proven to affect children and pregnant women. 80 % of our air pollution and global warming comes from the burning of coal. Normally I wouldn’t comment, but I felt compelled on this issue. I also much prefer the use of natural gas.
Jim,
Thermal coal at what cost? Rape of forests in Indonesia? Top soil destruction? I’ve lived in southeast Asia and seen the impact of smoldering underground thermal combustion. Take a look at the air quality in Singapore blown in from Indonesia from the smoke stemming from uncontrollable, smoldering, thermally combustible waste from land clearing for whatever reason.
I appreciate coal as a fuel alternative, but only if you can afford to invest in clean coal gasification technology. Most cannot or won’t. It’s proven, but very capital intense as you know.
While in China I came across a PhD dissertation out of S. Korea that estimated the underground fires from 4000 years of underground mom and pop coal mines in China generate CO2 to the atmosphere in a volume equivalent to the annual emissions from all US automobiles every single year. Soot in Seattle. Believe it!
I understand the concept behind your logic. It is very appealing and will probably pay off for investors. But there is a cost to all of us inherent in this investment idea … and it’s one our grandchildren will pay for long into the future.
Sorry for the emergence of some pangs of moral accountability into investment decisions, and I don’t usually comment in this vein. I prefer natural gas…..
Any thoughts on purchasing the commodity itself? What type of upside over the next two years?
Coal stocks pupped up on my radar screen about week or so ago. I only had one in mind but it’s a partnership. I really feel tired of partnership’s tax hassle. It’s great to hear couple of more names.
Jim,
Do you plan on putting Peabody Energy on your watch list any time soon?