Coal Prices: A Buying Opportunity Or A Bearish Signal?

Includes: ANRZQ, KOL, PKOL
by: Shaun Connell

China Daily recently reported that coal demand would likely fall in the second quarter of 2012, because of the now sluggish and slowing Chinese economy. The newspaper reported:

Supply and demand will continue to be roughly balanced in the country's coal market during the second quarter, Wang Xianzheng, chairman of the China Coal Industry Association, said at a meeting...

China's coal output reached 838 million tons during the first quarter, up 5.8% year-on-year, official data showed.

Buying Opportunity or Bearish Trend?

Could this be a buying opportunity for those who believe in a long-term bull market for coal? It's possible, but coal isn't necessarily as simple as that.

Market Vectors-Coal ETF (KOL) has dropped sharply over the last year, even with the overall increased demand in coal from China, along with plenty of other coal stocks and mining companies.

PowerShares Global Coal Portfolio (PKOL) hasn't fared much better over the last twelve months, in stark contrast with the rest of the stock market.

As far as individual stock plays go, Alpha Natural Resources, Inc. (ANR) has been battered for the last year, leading many -- including yours truly -- to begin looking for an entry.

This has led David Steinberg, a portfolio manager at DLS Capital Management, to say:

The valuations are approaching 2009 lows and the businesses have fairly stable characteristics ... This is a pretty good spot.

Of the three listed above, ANR is the one with the most probable upside.

Of course, the latest coal-producer's market bottom might not be anywhere close, especially if the latest economic data continues to show bad signs for China and the global economy overall.

A Risky Play

For those with an appetite for roller-coaster rides and extreme risk, Bumi PLC is a fun speculation. It's an Indonesia company mixed with some of the biggest emerging market coal producers and Nathaniel Rothschild, who is no stranger to commodities and mining mega-corporations.

Why is it so volatile? Not only is it a huge speculation, but the drama going on over at Bumi PLC could probably be turned into a soap opera. Rothschild began as a co-chairman, but after rumors and conflicts for quite some time, Financial Times reports that he's now just a director.

The Future of Coal

The future of coal is uncertain. No way around that. It will likely have a very, very large role in emerging markets -- China especially. But the U.S. is constantly enacting new measures to shut down coal, meaning who knows what for coal markets.

For the long run -- like the next 25 years -- I'm bullish on coal and am looking for great opportunities. Coal demand is a huge opportunity.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ANR over the next 72 hours.