As emerging markets continue to grow at stellar rates and developed markets continue to rebuild their economies, the demand for coal is expected to increase providing positive price support for the Market Vectors Coal ETF (KOL) and the PowerShares Global Coal Portfolio ETF (PKOL).
The primary driver in increased demand for coal is expected to come from global power generation. Coal is absolutely essential when it comes to the generation of power. In fact nearly 40% of the world’s electricity is produced using coal and continues to remain the main fuel in electricity generation in China, India, US, Germany, Australia and many parts of Europe. With the expected growth in purchasing power of emerging markets and the overall growth in global population, the demand for global electricity is likely to follow. Increased demand has already been seen in the US, as electricity consumption increased by nearly 2% over the previous year.
Another driver behind enhanced demand in coal is expected to come from increased demand for steel from developing markets. In fact, nearly 70 percent of the world’s steel is produced using coal. As nations like India and South Africa focus on improving infrastructure and China continues to expand its manufacturing sector, demand for steel and indirectly coal will follow.
Although there is an ample supply of coal in the global markets, increased demand driven by global energy consumption and the focus on improving infrastructure in developing nations could potentially bolster coal and the aforementioned ETFs.
When investing in these ETFs it is equally important to consider the inherent risks involved with investing in commodity driven equities. To help mitigate the effects of these risks, the use of an exit strategy which identifies when downward price pressure is likely to prevail is important.
Disclosure: No positions