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Time To Consider The Coal ETF?

April 10th, 2014

coalThe black diamond finally seems to be shining. After stern environmental legislation aimed at reducing carbon pollution in America, resurgence of alternative energy sources, supply glut and listless demand from key markets, coal or ‘black diamond’ got a thrashing in the recent past.

This darkness was further validated by the Industrial Info Resources’ data which revealed 39% less active coal mining projects in the U.S. in 2013 than 2011 levels. However, some of the gloom was lifted when CONSOL Energy Inc. (CNX) came out with upbeat coal guidance on Apr 7. The diversified fuel producer raised its annual coal production guidance range from 30.1–32.1 million tons to 31–33 million tons.

Per the energy company, demand for thermal coal appears solid ahead though metallurgical coal demand, particularly in Asia, would still be fragile. However, higher thermal coal demand seems to outweigh the lower metallurgical coal demand which spurred Consol energy to raise the production guidance.

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The company’s coal mines produced 8.1 million tons in the first quarter of 2014 and the sales almost neared production. Also, the start of longwall production in the company’s new BMX Mine at the scheduled time indicates that the extremely dark clouds on coal industry might have started to disappear.

Market Impact 

As expected, the production guidance came like a breath of fresh air for the entire coal industry. Not only Consol Energy, many other coal producing companies got the much-needed boost soon after the release of this news.

On April 8, Consol Energy itself gained 3.17% in the key trading session, Peabody (BTU) was up 2.25%, Alpha Natural Resources (ANR) received as much as 7.25% of price appreciation and Arch Coal (ACI) added 3.19%.
Not only Consol, BHP Billiton (BHP) too made some sort of dovish comments on coal demand this month. It expects global demand for coal to be strong till 2030 thanks to its affordability and enhanced demand from China and India, but coal prices may remain suppressed due to over production.

As per Exxon Mobil (XOM), coal will retain the second spot among energy sources in the near future. But gas will take over coal by 2025 and become the second-most used energy source globally, with both still lagging crude oil.

However, all is not yet well for coal companies. Renowned brokerage firm UBS downgraded its rating (on Wednesday) to Sell on some coal stocks like ANR, ACI and Walter Energy Inc. (WLT).

Still, Consol energy was not slapped with a rating cut. Rather, another brokerage firm, Macquarie, raised its rating on Consol to Outperform from Neutral. As a result, both ANR and ACI pared gains drastically while Consol was up another 1.44% as of April 9.

Clearly, coal investing is presently in a dicey situation with the expected revival of coal demand being a heavyweight factor. While playing this upbeat demand outlook is certainly possible through individual stock picks, this approach could produce high levels of volatility and miss out on some of the big winners.

Instead, investors may be better served by taking an ETF route for a wide exposure to the space. Below, we have highlighted the only coal ETF – Market Vectors Coal ETF (KOL) – in detail.

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NASDAQ:PKOL, NYSE:KOL


 

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