Coal is the second largest overall source of energy and has witnessed demand grow at rates higher than oil and natural gas over the past few years and is expected to continue to do so, paving the path to opportunity for the Market Vectors Coal ETF (KOL) and the PowerShares Global Coal Portfolio (PKOL).
One of the reasons coal is attractive is that it is cheap in relative terms. When compared to crude oil, the average price of coal over the past fifteen years is roughly one-third the price and is less than half the price of natural gas.
Another reason coal is attractive is the wide distribution of coal reserves. In fact, coal has a better worldwide geographical distribution than petroleum and is expected to continue to do so. Coal is a complex natural resource that is primarily used to fuel power or cement plants, two commodities that are expected to see increases in demand as global populations increase and per-capita income in developing nations increase.
Increased demand for coal is already being seen in China, which accounts for nearly half of global coal demand and is being used for power generation and metallurgical coal to produce steel. Additionally, increases in demand are expected to be seen in India, which currently only accounts for 7.5% of global coal consumption.
Lastly, although renewable energies continue to make headlines and have boasted rapid growth, renewables only account for a very small proportion of the world energy mix. Meanwhile, coal continues to lead consumption growth in the energy sector for its sixth consecutive year. As for the near future, coal is likely to remain the fossil fuel of choice for energy production due to its low costs and availability.
As mentioned earlier, some ways to play the coal markets include:
- Market Vectors Coal ETF (KOL), which includes Peabody Energy (BTU) and coal producer Alpha Natural Resources (ANR) in its top holdings
- PowerShares Global Coal Portfolio (PKOL), which gives global exposure to the coal markets and includes Peabody Energy, China Shenhua Energy Company Limited (OTCPK:CSUAY) and Consol Energy (CNX).
When investing in coal, it is equally important to keep in mind the inherent risks that are involved with investing in such a volatile commodity. To help mitigate these risks, the use of an exit strategy which identifies specific price points at which downward price pressure is likely to be seen is important.
Disclosure: No positions