Coal - The Great Rally Could Depend On The Nov. 8 Outcome

| About: VanEck Vectors (KOL)


Coal makes a big comeback.

Coal is still an important energy source.

The answer for coal will be technology.

An overdue bounce but still a bankrupt industry.

The election is important for coal.

In the United States, coal has been nothing short of a four letter word over recent years. With increasing regulation surrounding carbon emissions, the death of coal as a source of energy has become an old story. Coal mines in the United States have shuttered, and miners have found themselves out of work. The U.S. administration has been working overtime to rid the world of any form of energy generated by coal. Even coal-addicted China and India have succumbed to pressure from the U.S. and Western Europe to seek other, 'cleaner' forms of energy. Things looked mighty bleak for the price of coal; in fact, coal looked like it might be the first commodity since onions that would trade at zero.

On February 11, when oil, iron ore, the Baltic Dry Index, and many other industrial commodities hit multiyear lows, the price of December ICE coal futures traded in Rotterdam hit the lowest price in decades when it traded to $38.40 per ton. The coal industry looked dead as bankruptcies became the norm rather than the exception.

Surprisingly, and very quietly, the price of coal bottomed in the middle of February, and as of October 10, the price was almost double and at the highest price since 2014.

Coal makes a big comeback

Just like many other raw material prices, coal traded to its nadir in early 2016. Click to enlargeSource: Bar Charts

As an example, the price of ICE Newcastle Coal futures hit bottom at just over $42 per ton in January 2016 and was trading at over $86 on Thursday, October 13, 2016. Click to enlargeSource: Bar Charts

The besieged energy commodity remains far below the peak price of over $140 per ton reached in 2011. However, considering where coal was earlier this year, it has made a dramatic and surprising comeback.

Coal's rebirth is not a result of increasing demand; it is the supply side of the fundamental equation that lifted the commodity from lows. China cut coal output by 10% this year to help increase prices for struggling miners and lower pollution levels in the nation. China is the world's number one coal producer, but the output reduction caused more reliance on imports to fuel power stations and feed steel mills across the nation. As a result of the Chinese production cuts, thermal coal used to generate electricity is up over 55% so far this year while coking coal, used to make steel has almost tripled in price.

Coal is still an important energy source

While coal carries one of the most negative connotations in the world of commodities these days, it is still a critical energy source, particularly in countries like China and India. A sign of just how vital coal supplies are for China is that authorities in the nation are now considering relaxing the output policy. The price of coking coal averaged $133 per ton in the third quarter and was trading at the $218 level on October 11.

There continue to be lots of pressure from Western Europe and the United States when it comes to environmental concerns and global warming that result from burning coal as a fuel. However, the price action over recent weeks tells us that while China responded with a production cut, demand has caused the price to explode and they are rethinking their stance on the subject.

It is not just China that is responsible for the rally in coal, Nippon Steel and Sumitomo Metal Corporation, Japan's largest steelmakers recently bought coking coal from Peabody Energy Corp. at $200 per ton for the fourth quarter. That price is the highest since 2012; pretty steep considering it was at $92.50 in Q3.

The answer will be technology

The recent price rise in coal will do little to deter the environmentalists who will continue to work to remove coal from the earth's list of energy choices. I believe that coal continues to have a future in the world as it is a cheap fuel source. However, the future of coal relies on science at this point. The answer to the coal riddle will come from a laboratory.

Technology will eventually create techniques and methods for coal consumption that will reduce the effects of burning the energy commodity on the environment. Whether liquefied coal or other forms will pass the environmental smell test in the future will depend on the openness and ingenuity of the private sector and governments around the world. Meanwhile, the U.S. has been on the forefront of anti-coal policy around the world, but the market that appeared dead in early 2016 has suddenly lurched back to life.

An overdue bounce but still a bankrupt industry in the U.S.

While Peabody Energy Corporation (OTCPK:BTUUQ) recently sold coal to the Japanese at very attractive prices, the company filed for Chapter 11 protection from creditors in April of this year. Peabody is the largest coal producer in the U.S. Arch Coal; the second-largest coal producer entered into bankruptcy in early 2016, but it is in the final stages of financial restructuring and told investors that it is ready to emerge from Chapter 11 with $300 million on its balance sheet shortly.

The Market Vectors Coal ETF (NYSEARCA:KOL) has rallied aggressively in 2016. Click to enlargeSource: Bar Charts

After trading to lows of around $5 per share in early 2016, KOL was at the $12.45 level on Thursday, an increase of almost 150%. For those looking to play the bullish trend in coal, the best vehicles are likely this KOL ETF as well as the world's dominant producers like BHP Billiton and Glencore. Meanwhile, coal has been an issue in the U.S. Presidential election, and the future of the industry could rest in the hands of voters on November 8.

The election is important for coal

The country with the largest coal reserves in the world is the United States. While China is the biggest producer, they are only number three when it comes to total reserves within their borders. The second largest coal reserves are in Russia and the fourth in Australia. Therefore, U.S. coal policy will have lots of influence However, in the event of a Republican victory, Donald Trump has expressed support for the U.S. coal industry and promised to return coal miners to work. The U.S. has exerted significant pressure on the world to kill coal over recent years and another four years of Democrats in the White House will likely lead to a continuation of pressure on the price of the energy commodity. If Trump can pull off a surprise victory, the U.S. may well return as the world's largest coal producer replacing China. When it comes to the coal market, it is all about energy regulation and the market will have an answer in less than one month. This election could be the most important event in history for the future of coal.

Meanwhile, the ultimate verdict for coal in the long-term will come from science. The world is rich with coal reserves and with the population increasing on an exponential basis the demand for energy around the globe will continue to rise. In my opinion, technology will eventually provide an answer and coal will not disappear from the earth as an energy commodity. Meanwhile, one way to wager on the upcoming election could be to go long KOL if you think Trump will pull off a Brexit-like shocker and go short if you believe the favorite, Hillary Clinton, will triumph at the polls.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.