Needless to say, coal has had a rough a year. New environmental regulations and cheap, abundant natural gas have helped give coal a temporary squeeze on prices. The Market Vectors Coal ETF (KOL) is down over 23% YTD and Patriot Coal (PCXCQ) was a poster child for failing coal industry.
Despite the negatives presented with coal, should you be a buyer? First, let's look at the facts: 40% of the world's electricity comes from coal, which is more than the alternative sources such as natural gas, nuclear power, wind, solar and geothermal combined. That is a significant chunk of reliance on coal that will not simply vanish overnight. While coal does have some environmentally unfriendly qualities it is cheap and abundant which gives it its continued appeal. That being said, continuing to develop and look for alternatives is a must.
To be far, it is important to note that US coal consumption is up 80% since the 1980s, however, harmful sulfur deposits into the atmosphere is down 40%. How can this be since coal is always campaigned as a dirty, harmful source of energy? The reasoning is plants use certain systems that are designed to take out 90% of the harmful properties in coal. These machines are called selective catalytic reduction systems (SCR).
Believe it or not, the rest of the world has a growing reliance on coal based energy. China, for example, supplies 450 million people over the past 15 years with coal burned energy. Due to this incredible increase in coal demand in Asia, economists believe that coal will power 44% of the world's electricity by 2030; up from 40% currently.
Turning to Europe and India, where coal consumption is continuing to grow. As natural gas prices rise in Europe and the world is questioning nuclear power, coal saw imports rise. India's imports of coal are up 30% over the past year as the emerging market looks for cheap ways to provide power to millions of citizens. To have a successful and healthy economy, you must be able to supply your population with power.
Last year, coal saw a record year with consumption reaching a high of 7.5 billion tons. With the world economy struggling, it makes sense that coal will remain to be the primary global choice for energy. Savvy investors such as Dennis Gartman have seen this growing dependence as a thesis for higher coal prices. At this point, the best way to play coal would be to buy the sector ETF listed at the top of this article; the Market Vectors Coal ETF . This was the ETF highlighted by Gartman as the go-to choice for playing the black rocks.
Whether you agree with using coal as an energy source or not, the sector has taken a huge hit this year. However, global demand continues to rise which means coal is a prime contrarian play for long term minded investors. The short term rebound in coal looks to be nearing a temporary end as prices have jumped from their lows. Over the long haul, coal's rising demand will lead to higher prices and a chance for you to make some great profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.