Cold weather in China will help the Market Vectors Coal ETF (NYSEARCA:KOL) and the PowerShares Global Coal Portfolio (NASDAQ:PKOL), as both funds have over 20% of their portfolios dedicated to the Chinese coal industry.
Unseasonably cold weather has gripped a number of Chinese provinces since the start of the year causing energy demand for home heating to outweigh supplies. One of the regions hit by the bitter chill is the Shanxi province, one of the nation’s major coal producers. Heightened demand coupled with the threat of extinguishing coal supplies has lead officials to enforce energy rationing.
In the north, the temperatures in some areas dropped to negative 31 degrees Fahrenheit. In response, coal prices have gained 15% in the area since last month.
The shortages have been further aided by a new government safety initiative which has lead to the closure of a number of small mines and hindered production across the major coal mining provinces of China.
Chinese firms China Coal Energy and China Shenhua Energy combine for about 13.1% of PKOL’s assets, and 14.6% of KOL’s assets. China Coal gained 2.18% in Hong Kong trading today, while China Shenhua advanced 1.77%. KOL was up only about 0.2% in late-morning trading.
Over the past month, KOL gained more than 15%, compared to about 10% for China Coal Energy and 5% for Shenhua, suggesting that there’s still room for price appreciation due to what looks to be a cold winter.
Longer-term, I prefer KOL over PKOL due to heavier U.S. exposure. Economic recovery and a stronger U.S. dollar will be supportive well after the recent weather-related Chinese price increases fade away.
Disclosure: Long KOL