Global Coal Prices vs. Energy Commodity Funds

 

The accompanying 5-month chart (click to enlarge) presents an analysis of the global price of near-month coal futures contracts from the U.S. (QL – Central Appalachian NYMEX Coal Futures), South Africa (AFR – Richards Bay ICE Coal Futures), and Europe (ATW – Rotterdam ICE Coal Futures) compared to the Market Vectors Coal ETF (KOL), U.S. Natural Gas Fund (UNG), and U.S. Oil Fund (USO). Although this is not a huge amount of historical data, the past five months present an interesting analysis given the tremendous volatility and decline in commodities and global equity markets.

The global price of coal declined by 20.6% as an equally weighted average of the futures contracts for the three regions compared to declines of 71% for KOL, and 48% each for UNG and USO. The strongest correlation occurs between AFR and ATW at about 97%, followed by QL and ATW at 80% and QL and AFR at 78%. The company-based KOL ETF demonstrates an average correlation of 69% with the coal prices from the three regions, which is actually lower than the U.S. Oil Fund. UNG has a very low average correlation of 52% to the three global coal prices compared to a much higher correlation of 75% for USO.

Given the importance of coal in the global energy markets, the lack of a commodity pool fund for coal, and the low correlation of KOL to global coal prices, a Coal Fund could be developed as a commodity pool fund to provide investors with exposure to the performance of near-month futures contracts for global coal prices from the following four major coal producing and exporting regions in the world as specified below. Also, Russian steelmaker Severstal (SVJTF.PK) recently agreed to pay $1B USD to acquire Pennsylvania-based PBS Coals [TSX: PBS], which was down from an original bid of $1.3B two months ago, but is still an encouraging sign that a deal is getting done.

1) United States (40% - 70%): NYMEX Central Appalachian Coal Futures (QL), Western Rail Powder River Basin Coal Swap Futures (QP), Eastern Rail CSX Coal Swap Futures (QX)

2) Europe (15% - 30%): Intercontinental Exchange (ICE) Futures Rotterdam (ATW)

3) South Africa (15% - 30%): ICE Futures Richards Bay (AFR)

4) Asia (up to 25% when issued) (Newcastle, Australia): ICE Futures – globalCOAL NEWC Index, ASX Thermal FOB Newcastle

Comments

[Greg Pinelli:]

Caveat emptor...Readers of this rather undifferentiated mismash...KOL is selling at an 11% PREMIUM to NAV...this definitely skews the correlations.

2008 Oct 26 08:24 PM