Glowing Prospects in the Coal Sector

Supply disruptions and the lack of coal self-sufficiency in Asia and coal supply disruptions have created an immediate global problem.

Australia is normally the largest exporter of coal in the world. Last year, Australia accounted for 65% of the world's coking coal exports. But, due to disastrous floods, six of the largest coal exporters in the world legally failed to deliver on contracts. This is a huge drop in supply.

Normally, other coal exporters would fill the gap. But South Africa has experienced structural power shortages and Russia is focusing on exporting gas, not coal. So that leaves the business to other players -- like the U.S. coal companies that also benefit from a lower dollar exchange rate.

Higher coal prices are nearly inevitable.

New coal capacity can't be turned on overnight. It takes time, money and corporate/government partnerships to create new integrated mine-railway-port projects for coal.

While many coal production projects have been announced worldwide, these are not likely to have an impact on current supplies until 2010. In the meantime, prices for available coal will continue to climb.

This coal cycle action has not gone completely unnoticed by investors. Looking at a composite of 60 companies, the global coal stocks have appreciated more than 60% over the last 52 weeks.

But we're not even close to done with the coal export cycle upturn.

Here are three ideas for long-term investors in coal.

1) Buy U.S. coal stocks, especially the exporters.

Overall U.S. exports of coal grew 19% last year. Recent first-quarter U.S. exports of coking coal signal the export pace is accelerating, running at an even hotter 35% growth pace from last year. Almost 60% of coal exports go to Europe and Latin America, primarily Brazil.