Oil is not the only energy commodity going up in this market -- just take a look at coal.
The price of U.S. coal futures solidly crossed above $100 per ton this month, more than double what they were six months ago. Coal stocks have popped in response.
Here are the fundamental forces pushing coal prices even higher and three strategies for investing in this improving sector.
The global demand for coal is rising
About two-thirds of the world's coal currently goes to fuel electrical plants and the rest goes primarily into steel and concrete production. New demand is coming from emerging markets. Together, according to U.S. Department of Energy estimates, China and India will account for 70% of the increase in world coal consumption over the next two decades.
In addition, the surge in non-Chinese iron production is driving demand for high-grade coking coal.
Coal supplies are falling
The biggest difference is that global supply conditions have fundamentally changed over the last year, especially in the two largest consuming countries.
China, the largest producer of coal in the world, is no longer coal self-sufficient. The booming economy was made possible by more electric power and steel plants, which both require coal to operate. The Chinese will eventually have to bring in more shipments of coal at higher prices, putting more upward pressure on global seaborne coal prices to sustain economic growth.
The story is nearly the same in India. Despite its reserves and production, India is not coal self-sufficient either, and has reduced exports too.
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.
The largest U.S. exporter of coking coal is
Alpha Natural Resources
, with a 22% market share of exports. The $5.6 billion market cap stock trades at an attractive seven times enterprise value to 2009 estimated cash flow. This is a real recovery story, with the average earnings expectations tripling to $6 per share for next year.
Among the largest U.S. coal companies, the $20 billion market cap
stands out as a favorite among portfolio managers. Over 50% of its pretax cash flow for 2008 will come from international operations. BTU has 70 million tons in 2009 and 130 million tons in 2010 that will become available at higher market prices.
Rounding out the list of largest five U.S. coal stocks are
. They will also benefit from the demand for steam coal from domestic users.
The coming higher coal prices will drive larger public companies to buy into coal companies to ensure they have supplies. Even smaller coal companies with poor earnings records are candidates for bolt-on acquisitions.
Take a look at
. It posted losses last year, but the stock is up 190% just in the last six months. The acquisitions, new capital raised and higher coking coal prices are making investors salivate over the potential returns.
2) Purchase international coal producers
A Canadian open-end mutual fund,
Fording Canadian Coal Trust
, is seeing rates for coal contracts running at $275 per ton, vs. $93 for 2007. The FDG units are up 30% over the last 30 days. Target prices are being raised to over $100 on FDG.
Australian coal investments are now very attractive. While the talks between
about merging have officially ended, the interest in Australian resource stocks still continues.
The next wave of acquisitions may be midsized Australian coal companies. Just last week,
, the world's largest steelmaker, acquired 14.9% of
Other midsized Australian coal producers to consider are
, which both sport market values of under $5 billion.
3) Invest in a coal ETF for broader exposure
In the U.S., the ETF for coal stock investing is
Market Vectors Coal
, a 39-stock fund that represents the companies engaged in the coal industry worldwide. With a small 65-basis-point expense ratio, it is an efficient way to get exposure to the global coal business.
Among other things, this fund holds mining equipment and service companies such as
In closing, the outlook for coal has changed dramatically in the last three to four months. Invest in coal stocks as a core part of a long-term portfolio -- especially now that the sector is just entering a global cyclical upturn. It looks like a timely opportunity.
Rudy Martin is the former director of research for TheStreet.com Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter.