11 Month Analysis of Coal Price, KOL, USO and UNG

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The accompanying chart includes an 11-month analysis of Central Appalachian Coal Futures (NYMEX: QL), Market Vectors Coal ETF (KOL), U.S. Oil Fund (USO), U.S. Natural Gas Fund (UNG), and S&P 500 (SPY).

The prices for coal futures from other areas of the world were excluded in the chart analysis to avoid congestion from too many data points and since the correlation is high (around 95%) to QL. An 11-month analysis was chosen since KOL began trading in mid-January of this year and the chart was constructed using the daily closing price for each element.

Despite the market turmoil and widespread decline in commodities, the price of Central Appalachian Coal managed to gain 21.7% in the past 11 months, compared to declines of 63.2% for KOL, 54.6% for USO, 43.5% for UNG, and 34.6% for SPY.

Also, the coal company ETF (KOL) was only 54% correlated to the price of Central Appalachian Coal (QL), but KOL was highly correlated (90%) to the overall market as measured by SPY. In contrast, the price of coal had a very low correlation of just 29% to the overall market.

Given the importance of coal in the global energy markets, the lack of a exchange-traded product for coal prices, and the low correlation of the coal company ETFs to coal prices; a CoalFund could be developed as a new investment vehicle to provide investors with exposure to the performance of near-month futures contracts for the global price of coal from the following four major coal producing and exporting regions in the world as specified below:

1.) United States: NYMEX Central Appalachian Coal Futures [QL], Western Rail Powder River Basin Coal Swap Futures [QP], Eastern Rail CSX Coal Swap Futures [QX]

2.) Europe: Intercontinental Exchange (ICE) Futures Rotterdam [ATW]

3.) South Africa: ICE Futures Richards Bay [AFR]

4.) Asia (Newcastle, Australia): ICE Futures – globalCOAL NEWC Index, ASX Thermal FOB Newcastle

Comments

[James Wilson]

Big deal ! So coal supply is like the Oil Supply working from bubble to bubble.

Isn't that what these NEOCOONS are all about ?

Raising prices then shorting stocks when there is too much supply.

From CHAOS there is profit what is new about that ?

2008 Dec 22 05:52 AM

[User 327188]

Great article. It really highlights the disconnect between the price movements of KOL and the underlying commodity. The question is why is there so little correlation between the coal STOCKS and the coal COMMODITY? In the last 11 months the commodity has outperfomed the ETF by 80%!

I understand that some of the coal companies hedge and that not all of the 42 KOL companies are mining companies that sell the commodity. Some of the companies in the ETF will even have revenue sources that are unrelated to coal. However, are these explanations sufficient to support the paltry .541 correlation between KOL and QL?

In light of all this, how does one explain the .939 correlation between KOL and USO?

2008 Dec 29 12:30 AM

[SL39]

Simple answer: KOL covers mostly miners around the world whose pricing depends on international steam coal prices (Newcastle, Richards Bay and FOB Colombia) and metalurgical coal prices. Central App. is a US price, i.e with little bearing in international coal pricing since the US is just a swing supplier to the international market.

2008 Dec 29 07:51 PM

[User 327188]

SL39,

Your explanation doesn't make sense since the author says that, as one would expect, international coal prices are 95% correlated to US prices. Any other explanations?

2009 Jan 15 03:00 PM