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Coal Production

Written By Brian Hicks

Posted June 3, 2008

"While coal supply is bad for China, it’s great news for U.S. coal companies, which are predicting that global coal demand, will outstrip supply by 25 to 35 million metric tons. Coal consumption could rise 74% by 2030. India alone is expecting for its current annual demand of 460 million metric tons to quadruple by 2031. That’s great news for coal company earnings potential.

Digest that… and we’d recommend keeping an eye on Arch Coal (ACI:NYSE), which just raised its dividend, and the Market Vectors Coal ETF (KOL), which tracks the performance of a Stowe Coal Index that includes 60 global coal production and transportation companies," said the editors of Small Cap Trading Pit and Wealth Daily, April 26, 2008.

Two months after the recommendation, we’re still just as bullish.

ACI ran from a $54 low to a high of $68 after our mention, only to settle at $68 yesterday.


ACI coal chart June 2008


KOL ran from about $42 to about $54.


KOL coal company chart June 2008


And there’s still plenty of upside remaining, as coal futures now price for more than double what they were six months ago.

Coal Production and The Global Coal Problem

If it’s not one thing, it’s another for China… earthquakes… pollution… and we’re just months from the 2008 Summer Olympics. China, which depends on coal for 70% of its power, now warns that power plants are running out of supply, with some regions down to a three-day supply.

Reportedly, power plants in the Anhui province have about 2.8 days supply. Beijing has 6.9 day supplies. A week’s supply, say reports, is considered the danger line.

Even Australia, the largest exporter of coal, is having a tough time. Thanks to flooding issues, six of the largest coal exporters failed to deliver, causing a big drop in supply.

Sure, other coal exporters could easily fill the gap left by Australia. But South Africa has been busy dealing with power shortages. And Russia is more focused on exporting gas than coal.

And while coal production projects have been announced, we’re not going to see an overnight increase in supply. In the meantime, we’re stuck with rising coal prices… ahead of the 2008 Summer Olympics.

And we’re not the only ones still bullish on higher coal costs.

Friedman Billings Ramsey just raised its coal price forecast and upgraded Massey Energy, suggesting that demand will outpace supply through 2010.

The forecast for metallurgical coal was raised by 90% for 2009 to $130 per ton. For 2010, the forecast was raised to $250 a ton. For steam coal, used to produce electricity, prices were forecast to run another 25% in 2009 and 2010.

And it’s all thanks to lower supply and significant international demand. The steam coal market, they say, is "undersupplied as power demand accelerates the need for the commodity."

If you want to leverage low supply and high demand for coal, the KOL ETF and shares of ACI are still just as attractive. SC Trading Pit just issued a buy on an $8 laggard coal stock going to $12.

When markets get volatile, as they are now, investors start looking for a safe thing.

Coal Doesn’t Seem Boring when Investors are Nervous…

Another way to profit from coal is to buy coal dividend paying stocks, or those providing a steady source of income. Dividends help protect investors even during economic malaise.

Some of our favorite dividend-paying coal stocks include (dividends, according to Yahoo Finance):

  • Penn Virginia Resources (PVR) pays a 6.7% dividend.
  • Alliance Resources Partners (ARLP) pays a 5.2% dividend.
  • Natural Resources (NRP) pays a 5.9% dividend.
  • Progress Energy (PGN) pays a 5.8% dividend.
  • CH Energy (CHG) pays a 5.7% dividend.
  • Alliance Holdings (AHGP) pays a 4.3% dividend.
  • Arch Coal Inc. (ACI) pays a 0.60% dividend.
  • Massey Energy (MEE) pays a 0.30% dividend.

In our current economic meltdown, it’s best to diversify with stocks that can bring in consistent money to help offset hyper-priced food and energy bills. With the expectation of higher coal cost, plus dividend payouts, we expect further upside in each of the coal stocks we’ve mentioned.

The eventual goal of every investor is to go from supporting a portfolio to having a portfolio that supports the investor. That’s part of the reason we love dividend stocks. They produce a steady stream of income despite the direction of the broader market.

Good Investing,

Ian L. Cooper