So what are we to make of this? In the age of cheap gas and environmental awareness, is coal an industry in terminal decline?
Absolutely not. Though we may associate coal with mines in America’s Appalachian region, China is the most significant player in the coal market. China consumes nearly as much coal as the entire rest of the world combined, and despite being a major producer of coal for its own domestic use, China also imports massive quantities for use in the production of both energy and steel. In 2012, a year that saw anemic economic growth, China’s coal imports rose by nearly 60%.
Demand for coal among other emerging markets, such as India, is also on the rise. India is expected to overtake the United States as the second-largest consumer of coal by 2017, and its coal imports are expected to grow by well over 50% between now and then. And even in the developed world, coal consumption is on the rise in several countries, most notably the manufacturing juggernauts Germany and Japan. Worries of global warming have taken a backseat to fears of nuclear meltdowns after the Fukushima incident.
Coal’s pricing is also not as weak as the action of the past five years might suggest. Looking at the longer term picture we see a very different story. Aside from the 2007/2008 price spike, which saw the thermal coal CAPP price soar from $40 per ton to nearly $140 per ton in a matter of months, the price of coal has been relatively stable by energy standards. Prices have spent most of the past 12 years in a fairly tight band of $40-$80 per ton.
[ Enlarge Image ]Market Vectors Coal (NYSE:KOL)
So, is coal a viable investment theme? Judging by the performance of the Market Vectors Coal ETF (KOL), you might have second thoughts. Coal stocks have fallen by half over the past two years and have barely budged at all since June of last year. Yet coal stocks as a group trade for just 14 times rather depressed earnings, and the worst is likely over for coal pricing, as natural gas prices have shown some sign of stabilizing.
If you are pondering an investment in coal, Peabody Energy (BTU) is not a bad option. Peabody has enormous coal mining operations in Australia, which now account for the majority of the company’s profits. The Australian mines are well placed to serve China’s insatiable need for coal, which should only increase now that China is showing signs of life again.
Peabody is reasonably priced at 11 times expected earnings and just 0.7 times sales. This is not rock-bottom pricing by energy stock standards, but it is by no means expensive.
Longer term, the company’s biggest risk is a true hard landing in China, not the 7.5% growth we saw in 2012 that (only in China) counts as “slow growth.”
By “hard landing,” I mean a prolonged economic contraction not unlike that experienced by Japan starting in the early 1990s. I expect that hard landing to come before the end of this decade due to the country’s aging demographics and its apparent overbuilding of infrastructure in most of the higher-income coastal regions. But in the meantime, a short-to-medium-term rebound in China should bode well for coal prices and for coal stocks such as Peabody.
About the author:Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.
Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.