Coal Stocks Are on Fire

By Julian Murdoch

Last summer, I wrote about the prospects for getting into the coal market. At the time, I pointed out that "just because coal is up 140% does not mean that Joe's Coal Mine is all of a sudden 140% more profitable." And indeed, like so many bull markets of that halcyon summer, the bull market in coal came to a crashing halt, and brought down with it coal stocks, as well as the only coal-focused exchange-traded fund in town at the time, the Van Eck Market Vectors Coal (KOL).

The story has been pretty straightforward and painfully familiar: The global economy tanked, including China, and thus energy and steel demand for coal dried up. At least, that's what happened to the demand for the spot coal that shows up on charts. The reality from the coal company's perspective is that long-term contracts drive the bottom line, and those long-term contracts are negotiated based on real supply and demand - how many boatloads of the stuff go from point A to point B, and on what schedule.

One theory for the big pop in coal prices is that it was driven by the participation of speculators taking long positions, and it's quite possible that some of those longs are now out of the market. That speaks to a potential bottom in coal prices, a theory that was at least hinted at in our interview with Howard Gatiss, CEO of coal marketing giant CMC, in January.

So if coal has found a bottom, does that mean it's time to consider the coal miners themselves?

It might just be too late.

KOL and its new competitor, the PowerShares Global Coal ETF (Nasdaq: PKOL), both invest in a few dozen giant global coal players, with KOL being slightly more U.S. heavy, and PKOL making a slightly heavier bet in Asia. Practically speaking, the main differentiator so far is that KOL is a larger, more established fund with higher liquidity. Both have had phenomenal runs in just the past few weeks. So what's going on?

Well, it's certainly not the price of coal. While prices have edged up, deals are still being struck at big discounts compared with last year. In March, negotiations with steel companies resulted in up to a 60% drop in price from last year for coking coal. Thermal coal, which trades at a lower price, has also dropped. One deal between Xstrata & Chubu, a Japanese utility company, put the price for thermal coal around $70 per tonne - a 44% drop from last year ($125/tonne).

But the lack of movement belies the undercurrent of good news supporting the coal business. In April, the U.S. Energy Information Administration reported that 2008 exports had more than doubled versus 2007 (at 47 million short tons), despite essentially flat U.S. consumption. Further, it reported that there had basically been no change in the stocks of coal sitting at power plants and distributors, so there is nothing like the standing glut we've seen in oil.

The real kicker has been earnings season, however. A sampling: Massey Energy (NYSE: MEE) reported Q1 earnings in line with 2008 - an amazing feat enabled almost entirely by aggressive cost controls and sound business management. Alpha Natural Resources (NYSE: ANR) reported similarly surprising results last week, popping the shares almost 20%. Nearly every domestic coal company reported a position of competence and strength.

And the picture in Asia - always a bit of a ball-gaze - seems to be rosy for coal as well. Coal for delivery in China has been rising steadily in price during the past six weeks, and the company news from the big Chinese players (all present in the ETFs) has been nothing but good: China Coal Energy (KOL's largest holding) reported a greater than 17% increase in 2008 profits when it reported in April. Indonesian Bumi Resources (Jakarta: PBMRF) just reported a stellar first quarter, with profits up 20% over Q108.

Running through the few dozen companies that make up the indexes underneath the ETFs, it's hard to find a single company of size that hasn't reported good news. While the price of coal may not be rocket fuel, the companies that mine and sell the stuff are simply executing well.

Perhaps (fingers crossed) these are the kinds of stories that presage actual economic recovery. Because if the old economy rallies (and it doesn't get much older than coal miners), can the rest of the economy be far behind?

Or, perhaps, this is really just about China. China has recently acknowledged that it is in the process of constructing new coal stockpiles to hold between 80 and 120 million tonnes of coal - enough to supply the province of Shandong for less than a year, but still, a number equal to several years of U.S. exports.

Comments

[Mad Hedge F...:]

I wanted to get the low down on clean coal, a political hot potato in the energy sector, so I visited some friends at Lawrence Livermore National Laboratory. The modern day descendent of the Atomic Energy Commission, where I had a student job in the seventies, the leading researcher on laser induced nuclear fission, and the administrator of our atomic weapons stockpile, I figured they’d know. Dirty coal currently supplies us with 50% of our electricity, and total electricity demand is expected to go up by 30% by 2030. The industry is spewing out 32 billion tons of carbon dioxide (CO2) a year and the global warming it is causing will lead us to an environmental disaster within decades. Carbon Capture and Storage technology (CCS) locks up these emissions deep underground forever. The problem is that there is only one of these plants in operation in North Dakota, a legacy of the Carter administration, and they cost $4 billion each. The low estimate to replace the 250 existing coal plants in the US is $1 trillion, and this will produce electricity that costs 50% more than we now pay. And while we can build a wall to keep out immigrants, it won’t keep out CO2. This is a big problem as China is currently completing one new coal fired plant a week. In fact, the Middle Kingdom is rushing to perfect cheaper CCS technologies, not only for their own use, but also to sell to us. Since it appears that Obama is not willing to wait on anything, expect to hear a lot of sturm und drang about CCS this year.

May 11 05:47 PM

[Lightway:]

Great comment. CCS can also be augmented with recycling efforts, for example, using algae to capture the excess carbon (instead of just burying it in the ground forever), and the algae can then in turn be used as feed or fuel. Another company reuses carbon captured from its smokestacks to produce baking soda, of all things.

Algae has a tremendous potential, both as a fuel source, and as a source of excess CO2 mitigation:

www.greenfuelonline.co...


On May 11 05:47 PM Mad Hedge Fund Trader wrote:

> I wanted to get the low down on clean coal, a political hot potato
> in the energy sector, so I visited some friends at Lawrence Livermore
> National Laboratory. The modern day descendent of the Atomic Energy
> Commission, where I had a student job in the seventies, the leading
> researcher on laser induced nuclear fission, and the administrator
> of our atomic weapons stockpile, I figured they’d know. Dirty coal
> currently supplies us with 50% of our electricity, and total electricity
> demand is expected to go up by 30% by 2030. The industry is spewing
> out 32 billion tons of carbon dioxide (CO2) a year and the global
> warming it is causing will lead us to an environmental disaster within
> decades. Carbon Capture and Storage technology (seekingalpha.com/symbo...)
> locks up these emissions deep underground forever. The problem is
> that there is only one of these plants in operation in North Dakota,
> a legacy of the Carter administration, and they cost $4 billion each.
> The low estimate to replace the 250 existing coal plants in the US
> is $1 trillion, and this will produce electricity that costs 50%
> more than we now pay. And while we can build a wall to keep out immigrants,
> it won’t keep out CO2. This is a big problem as China is currently
> completing one new coal fired plant a week. In fact, the Middle Kingdom
> is rushing to perfect cheaper CCS technologies, not only for their
> own use, but also to sell to us. Since it appears that Obama is not
> willing to wait on anything, expect to hear a lot of sturm und drang
> about CCS this year.

May 11 11:26 PM

[osiso:]

JRCC was the catalyst for the latest run. I don't see it being sustainable.

May 12 12:28 AM

[john s. gordon:]

CCS is a wonderful concept if it works & if you can afford it. presently coal fired plants are sited all over the place, including mine-mouth and near population centers. to replace these will require siting studies to determine if (for example) a suitable saline aquifer exists @ that site than can absorb the product CO2. lot of work needs to be done here.
> jack

May 12 08:39 AM

[billp37:]

Composition of Air

Nitrogen N2 78.084% 99.998%
Oxygen O2 20.947%
Argon Ar 0.934%
Carbon Dioxide CO2
0.033%

mistupid.com/chemistry...

The Skeptics Handbook

joannenova.com.au/glob.../

The Real History of Carbon Dioxide Levels

www.freerepublic.com/f...

May 12 09:17 AM

[Turnipseed:]

For a rebuttal, see these

www.grist.org/article/.../
Http://realclimate.org/


On May 12 09:17 AM billp37 wrote:

> Composition of Air
>
> Nitrogen N2 78.084% 99.998%
> Oxygen O2 20.947%
> Argon Ar 0.934%
> Carbon Dioxide CO2
> 0.033%
>
> mistupid.com/chemistry...
>
> The Skeptics Handbook
>
> joannenova.com.au/glob.../
>
> The Real History of Carbon Dioxide Levels
>
> www.freerepublic.com/f...

May 12 02:48 PM