Why Coal Story Should Not Be Ignored

Includes: KOL, PKOL
by: Wyatt Investment Research

On Thursday, in "China's Dirty Little Secret Revealed," I discussed the strong upward momentum in coal prices and suggested you consider adding coal mining stocks to your portfolio.

Coal may be the last thing on earth that many investors would consider putting a dime into. But the world is on course to transition back to coal. You may wish it wasn’t the case, but it’s inevitable. Coal isn’t as clean of a fuel source as other options – but there is room for clean coal technologies to improve, and I believe they will. Investors should have a position in coal companies to be able to profit from the transition – or risk being left behind.

I was speaking with my friend and colleague Gregor Macdonald the other day. Gregor is a leading oil analyst and energy sector investor. He invests his own money in energy stocks, and has been quite successful. I value his opinion, and have profitably acted on his advice on numerous occasions. Both he and I are perplexed by the fact that more investors aren’t aware that coal is staging a comeback. We both agree that investors need coal exposure, but very few have it.

The World Coal Institute has some compelling data to support the claim that world coal demand is surging. According to the group:

In recent years, coal use has risen by 4.9% per year, faster than any other fuel. The use of coal is expected to rise by over 60% from 2006 to 2030, with developing countries responsible for 97% of this increase.

It’s clear that all arrows point to China when considering a coal mining investment. China gets around 78% of its electricity from coal. Over the last fifteen years, coal has helped the country double energy output. This energy boom has brought electricity to more than 450 million people in the country. That’s more people than in the entire United States – 47 percent more. But there are 1.32 billion people in China, meaning that more than 60% of the population is still without electricity. And that’s just the people – manufacturing demand uses around half of China’s electricity production. Unless manufacturing contracts in a massive way – a highly unlikely scenario – energy demand will continue to rise.

There are a few ways you can play the coal boom. You can buy a coal ETF, large cap miners, and domestic producers. Most coal companies are engaged in one or more coal operations, including mining, wholesaling, coking and washing. Coking coal is used in steelmaking, and with the infrastructure boom in China, these companies have seen demand soar. I like that angle, but right now I’m more bullish on mining operations. Growing energy demand for coal is the catalyst that I want exposure to, and mining is the way to get it.

Over the last fifteen years, coal has helped China double energy output. And since 2002 China’s coal consumption doubled as well. Coal demand in that China's domestic coal producers have no problem selling all the coal they can dig up. That's a trend I want to have exposure to.

There are plenty of compelling small cap opportunities in the coal sector - so if you’re looking for a way to flesh out your portfolio with small energy companies, you shouldn’t ignore the coal story. The grass doesn’t get any greener.

Disclosure: No positions