Coal has been killed in the past year or so. Its price has been hair-cute by half. It is just brutal. If you compared the S&P 500, the coal sector has been underperformed by about 40% over the past year. Why? The major reason is because the price for natural gas (NG) has also collapsed in the same time period from over $4 BTU to under $2 now. Now, natural gas is an alternative fuel to coal and energy companies are saving big money by switching from coal to natural gas as fuel. After all, NG is also relatively a clean fuel compared to the dirty coal.
Does that mean coal has no position now in the energy sector? Not at all. Coal is still a major source of fuel and in the US, coal is the number fuel used for generating electricity. The world just does not have enough alternatives to replace coal. When its price becomes cheap enough, the demand for it will pick up again as more companies will use it. Actually in the past month or so, coal’s price seems to be bottomed and is showing signs of recovering. I think we are very close to, if not yet at, the bottom for the bear trend of coal.
If you are interested in investing in coal, the easiest way is to buy an ETF for coal stocks, the Market Vectors Coal Fund (KOL). Of course, please check whether it is structured as a partnership. If so, I’d avoid buying it directly. Maybe do so via its options. Alternatively I like an Australian coal mining company, BTU, Peabody Energy. This company has been beaten up with a 50% hair-cut in the past 12 months. If coal is indeed bottoming up here, I think BTU will significantly benefit and catch up with its share price.
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