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Oktober 8, 2010

Emerging Markets Keep Coal Stocks Stoked
Agustino Fontevecchia, 10.07.10, 7:56 PM ET

Coal’s been on fire recently, with the Market Vectors Coal ETF up more than 32% since early July. Driven in part by an “inventory cleansing” but also by strong emerging market demand, especially from India and China which are responsible for almost half of the world’s demand, coal’s looking hot.

UBS analyst Shneur Gershuni explains that “the recession brought everything down, from generation levels to the natural gas industry to the steel market, in which metallurgical coal is a key component. About 112 million tons of demand were lost during the crisis, so producers were forced to cut production to catch up. When some sort of growth returned to the markets, an inventory cleansing began, the market tightened.”

Production increases have been slight, and even though there is a slight correction in demand, Gershuni says that it’s the production costs that are responsible for the improved performance of the coal industry. “Outlook looks good so pricing looks good” says Gershuni. “The cuts are much more important than demand in [causing prices to rise].”

Coal presents opportunities among both miners and makers of tools and equipment. Take a look at the composition of the Market Vectors Coal ETF. The two largest holdings in the fund are Hong Kong-listed shares of China Shenhua Energyand China Coal Energy. These Chinese holdings are followed closely by U.S. producers, Consol Energy and Peabody Energy and mining equipment company Joy Global.

“The recovery in China [has] added pressure on the market, as long as Asia needs to make steel, the market will continue to be constrained in terms of supply,” explains Gershuni. China produces about 70% of the coal it consumes, in 2009 they produced 2.8 billion metric tons (2.37 billion for thermal coal) with net imports of about 104.2 million metric tons, according to UBS.

Consol Energy, is expected to produce about 65 million metric tons in 2010, out of which 7.6 million will be metallurgical coal. This is going to become increasingly important as demand from emerging markets becomes ever more important.

Peabody Energy, which calls itself “the world’s largest private-sector coal company” boasts $6 billion in revenues. Apart from its large thermal coal U.S. business, Peabody hastrading offices in China and Mongolia. It’s operations include export terminals in Australia, where analysts expect it to produce for 2010 approximately 11 million metric tons of metallurgical coal and about 16 million metric tons of thermal coal. According to Gershuni Mongolia and Australia will be able some of the important players in generating more supply to alleviate market tightness, giving Peabody a stake in the global recovery.

Alpha Natural Resources is expected to produce 12.5 million metric tons of metallurgical coal for 2010, and 24.4 million metric tons of thermal coal from Eastern production. Along with Massey Energy, it is one of the few hybrid producers in the U.S.. “There are pockets of opportunity,” says Gershuni, “and it is important to notice that even though metallurgical coal has great possibilities, thermal coal will be necessary too. It’s not just steel production, electricity is important, too. Thermal coal will get better when demand starts showing up.”

Coal is the third most consumed fossil fuel and will represent 28% of the world’s energy consumption by 2035, according to a report by the Department of Energy. International trade in coal is expected to grow 47% by 2035.

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