Are Things Looking Positive For The Coal ETF?

coalThe increasing demand for utility services, particularly for electricity, is a primary driver for the demand of coal. Coal remains a dominant source of power generation worldwide. In the U.S. around 40% of the total power generation capacity is coal fired.

As per the World Coal Association (WCA), proven global coal reserves will last nearly 112 years at current production rates. On the other hand, proven oil and gas reserves are projected to last around 46 years and 54 years, respectively, at current production levels. Asia is the biggest coal market and presently accounts for 67% of the global coal consumption. (Read: Oil ETFs Surge on Strong Data)

Metallurgical coal or coking coal is used in steel production. So, the improvement in steel industry fundamentals improves the prospects of the premium variety of coal. The World Steel Association projected about 3% year-over-year growth in global steel usage in 2013 and 2014.

Despite the demand of coal for power generation and in other industries, there is an increasing global concern towards the emission of green house gases. President Obama’s Climate plan, which aims to lower carbon pollution in America, could impact the future prospects of the coal companies.

The President’s Climate plan calls for implementation of carbon pollution standards for both existing and upcoming coal-fired units that in a way could make coal-fired units more expensive and less attractive for operators. The electricity generators, in order to avoid the stringent regulation, could decide to erect power plants using natural gas or alternate sources, which will lower the demand for coal and impact the future profitability of U.S. coal companies.

However, with prices of natural gas going up in the U.S. and the expected surge in coal-fired units globally in the next few years, the demand for coal may improve. Second quarter earnings for the coal industry started on a positive note with Peabody handsomely surpassing the market expectation, resulting in a corresponding surge in coal ETF. (Read: Coal ETF Surges on Peabody (BTU) Earnings Beat)

Market Vectors Coal ETF (NYSEARCA:KOL) in Focus

KOL tracks the Stowe Coal Index, providing exposure to companies related to the coal industry. Even though this index has a global focus, nearly 46% of its investments are directed towards U.S. companies, followed by China with a 13% share.

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