Investment News: Money Morning » Coal http://www.moneymorning.com Investment News Provider Sat, 21 Nov 2009 18:52:59 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Hot Stocks: Coca-Cola’s Strong International Sales Serve Up Sparkling Third-Quarter Results http://www.moneymorning.com/2008/10/16/muhtar-kent/ http://www.moneymorning.com/2008/10/16/muhtar-kent/#comments Thu, 16 Oct 2008 07:30:42 +0000 admin http://www.moneymorning.com/?p=2714 [“Hot Stocks” is a new Money Morning feature that analyzes the investment outlook of global companies that are in the news. This is the fourth installment of this ongoing investment series.]

By Jennifer Yousfi
Managing Editor
Money Morning

The Coca-Cola Co. (KO) yesterday  (Wednesday) reported a double-digit increase in third-quarter earnings – a showing that topped analyst estimates and muscled aside a global slowdown that tripped up its archrival.

Just one day after beverage nemesis PepsiCo. Inc. (PEP) posted a 9.6% decline in third-quarter earnings, announced 3,300 layoffs and said it’s closing six plants, Coca-Cola posted a 14% increase in profit for the three months ended Sept. 26 – with strong international sales offsetting a weak domestic economy.

The upbeat results sent Coke shares up, even on a markedly down day for stocks. Coca-Cola stock hit a daily high of $47.33 yesterday, before closing at $44.21 – up 48 cents each and still good enough for a 1.1% gain on a day the Standard & Poor’s 500 Index plunged 9.03%.

“We once again demonstrated our ability to perform consistently, delivering our eighth-consecutive quarter of double-digit comparable earnings growth, despite an incredibly challenging economic environment,” said Muhtar Kent, president and chief executive officer, in a company statement.

Coca-Cola, the largest global soft drink maker, reported net income of $1.89 billion, or 81 cents per share, up from $1.65 billion, or 71 cents a share, for the same period the year before. The consensus analyst estimate was for Coke to earn 77 cents.

“The ongoing global slowdown is not yet evidenced in Coke’s business,” Deutsche Bank AG (DB) analyst Marc Greenberg wrote in a research note. However, Greenberg quipped, the report left him wondering “whether it was the last great quarter or if Coke runs the last great consumer staples business.”

It could well be the latter. While it’s true that beverage sales are declining in the United States – one of the problems that caused Pepsi to stumble, Coca-Cola’s strong international presence more than makes up for it. On a volume basis, Coca-Cola sales increased 7% internationally, which more than offset a 2% domestic decline.

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Coca-Cola’s strong marketing campaign, centered on the Beijing Summer Olympic Games, helped to boost sales. The Atlanta-based soft-drink maker rang up double-digit sales increases in such emerging markets as China, Turkey, India and Nigeria for the quarter, Reuters reported. The company also got a currency boost from a relatively weak U.S. greenback, which increases the value of non-dollar denominated sales.

Coca-Cola also has been more adept than its rivals at targeting key shifts in consumer taste. While its core soda brands – Coke, Diet Coke, Sprite and Fanta – saw a 3% global increase for the quarter, such other products as Minute Maid-brand juices and Glaceau vitaminwater experienced a 10% increase.

“We anticipate that the operating environment, especially in North America, will continue to be challenging as we finish 2008 and move into 2009,” Kent, the CEO, said in the statement. “However, we have been diligent in taking the evolving landscape into account as we are planning for 2009, and believe that the solid fundamentals of our business, our strong balance sheet and cash generating capability, the experience of our management team and the strength of our brands will drive the business through these difficult economic times.”

The 2008 third quarter was Coke’s first with Kent at the helm. He took over on July 1 as president and CEO.

Kent worked his way up from his position as president of Coca-Cola International, and before that he was president of the company’s North Asia, Eurasia and Middle East Group. So he may well be the perfect candidate to steer Coca-Cola through the current economic landscape in which emerging markets offer the best growth potential.

Coke shares have certainly taken some lumps this year, along with the rest of the market, as the blue-chip Dow Jones Industrial Average component is down 28% year-to-date. But the Dow itself is down more than 35% so far this year. And with Coke’s strong results appearing to maintain the safety of its 38-cent quarterly dividend, some analysts believe it’s time to take advantage of this international beverage powerhouse.

“There may be economic disruption in the near-term, but Coca-Cola always tends to come up on the other side of it in fairly decent shape,” Greggory Warren, an analyst with Morningstar Inc. who recommends buying Coca-Cola shares under $50, said in an interview with Bloomberg News prior to the earnings release.

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]]> http://www.moneymorning.com/2008/10/16/muhtar-kent/feed/ 2 How Coal Shortages in China Will Spark More Foreign Takeovers of U.S. Assets http://www.moneymorning.com/2008/07/21/china-coal-shortage/ http://www.moneymorning.com/2008/07/21/china-coal-shortage/#comments Sun, 20 Jul 2008 22:08:30 +0000 Jason Simpkins http://www.moneymorning.com/2008/07/21/how-coal-shortages-in-china-will-spark-more-foreign-takeovers-of-u.s.-assets/ By Jason Simpkins
Associate Editor

The recent buyout of Alpha Natural Resources Inc. (ANR) by Cleveland Cliffs Inc. (CLF) could ignite more than $50 billion worth of M&A deals in the U.S. coal industry over the next few years as Mainland China rushes to solve a major energy shortfall.

"In the next 12 months there will be an unprecedented amount of both domestic and cross-border mergers and acquisitions," Wilbur Ross, chairman of International Coal Group Inc. (ICO), told Bloomberg News. "U.S. reserves are undervalued relative to those in the rest of the world."

Ross, the billionaire investor who helped consolidate the U.S. coal and steel industries, considers this the start of a round of mergers that will prove Cleveland-Cliffs prescient in its Alpha bid.

The top eight U.S. coal producers, which are worth more than $50 billion, are possible takeover targets for a country desperate for resources. And compared with China, American coal companies are bargains.

China Shenhua Energy Co., Asia’s biggest coal company is valued at $15.52 for every ton of coal it holds, compared to $2.11 a ton for Peabody Energy Corp. (BTU), and $1.76 for International Coal, Bloomberg reported.

At a point when the U.S. economy is slowing under the weight of a growing financial crisis, and spiking food-and-energy prices, escalating growth in the developing economies around the world has ignited a bull market for coal that analysts believe could last for at least 10 years.

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And that’s going to lead to a major shift in the ownership of coal-related assets.

Enter the Red Dragon: China’s Coal Crisis

China, home to 1.3 billion people and the world’s fastest-growing economy, counts upon coal for 80% of its energy needs. Indeed, it’s the world’s largest coal producer, as well as its largest consumer. Coal demand in China jumped nearly 9% last year – meaning the Eastern power now accounts for a full quarter of the world’s annual coal consumption. So it’s no surprise at all that the growing global discrepancy between supply and demand is most acute in China.

Vic Svec, a senior executive at Peabody Energy, the world’s largest private-sector coal producer, referred to China’s ability to influence the price of commodities as a "butterfly effect."  In other words, "demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming," Svec told The Wall Street Journal.

Svec’s right. Five years ago, China exported 83 million metric tons more coal than it imported. But last year, the nation’s surplus dropped to a meager 2 million metric tons. That means more than 80 million metric tons of coal (about 12% of the internationally traded market)has been taken out of global circulation.

That’s a big reason why the highly coveted low-sulfur coal from the Powder River Basin in Wyoming and Montana has climbed from less than $10 a ton last year, to nearly $15 a ton – a price gain of 50%. And why thermal coal prices at Australia’s Newcastle port, a benchmark for the Asian market, have more than doubled this year.

Ironically, the high prices demand and China helped create, have left the country on on the brink of a potentially disastrous energy shortfall. Overseas coal has simply become too expensive for China to import.

The Asian nation imported just 21.55 million metric tons of coal in the first six months of this year, down 20.4% from the same period last year, according to China’s customs bureau.

Now, the county is suffering through its worst power shortage in decades because of soaring demand and inadequate supplies.

Nearly half of China’s provinces have started to ration electricity. Last month, the government raised electricity tariffs by 5% but prices are still 30% lower than current coal prices would imply, according to BNP Paribas SA (OTC ADR: BNPQY) estimates. And that has forced many smaller energy producers out of business.

The government in Beijing tried to deal with the matter by imposing price controls on electricity that make it impossible for energy suppliers to raise their prices, even as they pay more for natural resources that have skyrocketed in price. But that measure is driving smaller producers out of business.

"Large state-owned power companies have no choice but to keep operating and we have seen strong power generation growth from them so far this year despite the high coal prices," Daisy Zhang, an analyst with BNP Paribas in Shanghai, told the Financial Times. "But smaller power plants have been shutting down because the more they operate, the more [money] they lose."

Figures from the China Electricity Council for the first five months of this year show that out of a total of 4,800 power plants, 1,800 suffered net losses over the period. The overwhelming majority of the losers were fueled by coal.

The government has also capped the price of coal but that hasn’t alleviated the pressure energy suppliers either.

"If a coal company wants to raise prices it just issues a notice and that’s it. There’s no way [to refuse] even if you don’t agree," one coal purchaser with a power plant told the Shanghai Securities News last week.

The newspaper also cited industry officials as saying that coal companies have been refusing to honor contracts, thereby forcing power firms to buy from the spot market, where prices are considerably higher.

While previously around 80% of contracts were honored, the figure has dropped to 60%, the Shanghai Securities News said.

Another problem is the growing number of coal exports. Beijing has capped the price of coal sold in its home market, but global prices continue to rise, which makes exporting coal far more profitable. The difference between domestic and global coal prices was about $54.70 per metric ton in the week ended on July 4, China Business News reported.

China exported 25.49 million metric tons of coal in that time, a 10.2% increase from the year prior. In fact, China’s coal exports soared 83.5% year-over-year in June to 6.99 million metric tons, the highest monthly total since March 2005, even as the nation suffered through a shortage of the fuel that has resulted in blackouts across the country and a multitude of energy providers being shut down.

While many in the industry anticipate Beijing will raise energy tariffs further after the Olympic games, few believe that will be enough. It seems apparent that the solution for China’s coal crisis is to get more coal, and many believe it will through cross-border acquisitions.

China Ready to Pounce on U.S. Coal Suppliers

The total volume of mergers and acquisitions (M&A) dropped by 36% in the first half of 2008, the slowest start since 2005, according to Dealogic. But while deal volume in the United States tumbled 40%, transaction volumes jumped 5% in Asia.

The pickup in Asian transactions is largely attributable to Chinese companies, which announced plans to buy a combined $42 billion in foreign assets. That’s more than five times the amount Chinese companies spent on M&A in 2007, according to Dealogic. It’s also equivalent to the combined volume of all the foreign takeovers by Chinese companies from 2000 to 2006.

Also, while deal volume was down in most every sector, takeovers of energy and mining companies shot up 33% in the first six months of 2008. And that is only a small indication of things to come.

The recent buyout of Alpha Natural Resources Inc. by Cleveland Cliffs Inc. could pave the way for more than $50 billion worth of M&A activity in the U.S. coal industry over the next few years, Bloomberg News reported.

"People will look back on this as the first major U.S. event, not as overpriced," International Coal’s Ross said.

Another factor to consider is the weakness of the dollar, which makes U.S. assets even more affordable for foreign companies.

Cross border activity represented 40% of the $1.6 trillion in first-half deals and, according to Thomson Financial, "was aided by emerging economies with cash to spend and favorable exchange rates in the U.S."

Chinese interests have already displayed an aptitude in acquiring resources vital to their growth. This was evidenced earlier this month, when Sinosteel won its hostile bid for Midwest Corp. Ltd., an Australian iron ore producer. Iron ore, the other key ingredient in steel production, has more than doubled in price over the past year.

Also, in February, Aluminum Corp. of China (ADR: ACH) teamed up with Alcoa Inc. (AA) to buy a 12% stake in Rio Tinto PLC (RTP) hoping to thwart an unsolicited takeover from BHP Billiton Ltd. (BHP) that would have give the Australian powerhouse control over a third of the world’s iron ore.

So far, all but one of the 10 unsolicited hostile bids launched by Chinese firms on foreign targets since 2005 have focused on natural resources, according to The New York Times.

"Working on China-related deals two or three years ago, I once gave a presentation to an interest group in which I said Chinese investors did not yet have the appetite for hostile takeovers," a Chinese lawyer working for an international law firm told China Economic Review. "But I am sure we will see a lot of more of these over the coming months and years. Chinese investors are increasingly sophisticated."

The attorney went on to say that he was currently working on two commodities-related investments by Chinese firms in Australia – one of which could well end with an aggressive takeover bid.

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]]> http://www.moneymorning.com/2008/07/21/china-coal-shortage/feed/ 0 Cashing in on Commodities: The Short- and Long-Term Solutions to the Growing Global Energy Crisis http://www.moneymorning.com/2008/05/20/cashing-in-on-commodities-the-short-and-long-term-solutions-to-the-growing-global-energy-crisis/ http://www.moneymorning.com/2008/05/20/cashing-in-on-commodities-the-short-and-long-term-solutions-to-the-growing-global-energy-crisis/#comments Tue, 20 May 2008 11:36:42 +0000 Jason Simpkins http://www.moneymorning.com/2008/05/20/cashing-in-on-commodities-the-short-and-long-term-solutions-to-the-growing-global-energy-crisis/ Editor’s Note: This is the first installment of a new Money Morning series highlighting investment opportunities created by the global bull market in commodities.

By Jason Simpkins
Associate Editor

Crude oil is grabbing the headlines but it’s coal and uranium that together provide nearly half the world’s power.

So it follows that as worldwide demand for electricity skyrockets – as it will – the shares of companies that provide these two key fuels also will take flight.

And they make for almost-perfect partners.

That’s because coal represents the world’s short-term solution to the problem of a rapidly climbing global demand for power. It’s plentiful, it’s cheaper than other available alternatives, and a big percentage of the world’s power plants are set up to burn this fossil fuel.

Uranium, on the other hand, represents the long-term solution to potential fuel shortages – and it offers a solution to global warming, to boot. Uranium-powered commercial nuclear plants are cheap to operate, can run a long time, and when operated correctly cause little pollution.

The New ‘Black Gold’

India, a growing economic and industrial power, relies on coal for nearly 70% of its total energy supply. And the World Coal Institute expects India’s energy consumption to rise by as much as 8% to 10% annually through 2020.

Coal also is used to satisfy the Red Dragon’s energy appetite, providing 78% of China’s total power needs. Coal demand in China jumped nearly 9% last year – meaning the Eastern power now accounts for a full quarter of the world’s annual coal consumption, The Wall Street Journal reported.

Five years ago, China exported 83 million metric tons more coal than it imported. But last year, the nation’s surplus dropped to a meager 2 million metric tons. That means more than 80 million metric tons of coal (about 12% of the internationally traded market) has been taken out of global circulation.

Vic Svec, a senior executive at Peabody Energy Corp. (BTU), the world’s largest private-sector coal producer, referred to China’s ability to influence the price of commodities as a "butterfly effect."  In other words, Svec told The Journal, "demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming."

Svec’s right. China’s recent development is part of the reason the highly desirable low-sulfur coal from the coal-laden Powder River Basin in Wyoming and Montana has climbed from less than $10 a ton last year, to nearly $15 a ton – a price gain of 50%.

Central Appalachian coal, the benchmark grade widely used by power plants, jumped from $40 a ton in early 2007, to nearly $90 a ton now, according to a recent report by the Associated Press.  That’s price increase of 125% in just a single year.

Meanwhile, the weekly index for power station coal prices at Australia’s Newcastle port, a benchmark for the Asian market, averaged $126.45 per metric ton in the month of April, up nearly 40% from January.  The port’s weekly price index rose to $133.63 per metric ton for the week ended May 9 – an 11-week high according to the globalCOAL NEWC Index. The index is up approximately 49% this year.

According to the Energy Information Administration, world coal consumption could expand by 74% from 2004 to 2030. And that will only drive prices higher.

While demand for coal is at an all-time high, the same can’t be said for coal supplies. Harsh weather conditions and infrastructure constraints in coal-producing regions have severely crimped supplies.

In South Africa, power shortages and flooding have closed down several key mines. With such setbacks, the price of coal coming out of South Africa’s Richards Bay Coal Terminal, the world’s largest, jumped nearly 90% last year.

Xstrata PLC, the world’s biggest exporter of power-station coal, said that first-quarter coal output fell 3.6% after floods and rain delays diminished supplies from Australian mines. Monsoon rains throughout the region also impacted archrivals Rio Tinto PLC (RTP), and BHP Billiton Ltd. (BHP). 

Meanwhile, China, a leading producer and consumer, was devastated just a few months ago by the worst blizzard of the past half-century. Three weeks of snowfall killed at least 60 people and cost the country approximately $7.5 billion.

China had already closed a multitude of coalmines in 2007, after they were deemed unsafe. The subsequent weather problems only exacerbated that situation, forcing the closure of a great many more mines and prompting China to restrict exports. Major roads and railways also were shut down, creating traffic congestion during the thickly traveled Chinese New Year – and making deliveries highly problematic for drivers.

As the cold of winter gave way to the higher temperatures of spring and summer, yet another weather-related challenge emerged. This time around, the double-whammy of higher-than-expected temperatures coupled with sparse rainfall are straining thermal power plants: The warm weather is boosting the use of energy-intensive air conditioning even as those same higher temperatures have dropped the water level of the rivers that spin the huge power-producing turbines at hydroelectric dams.

If you’re looking to play surging coal prices, Money Morning Investment Director Keith Fitz-Gerald suggests taking a look at Yanzhou Coal Mining Co. (YZC). The China-based Yanzhou is nicely diversified in several ways:

  • First, it not only operates underground coalmines, Yanzhou also operates a railway transportation network for shipping coal.
  • Second, Yanzhou’s focus on low-sulfur coal products means it finds demand from large-scale power plants and from metal-producing companies all around the world. The reason: Low-sulfur coal can be combined with coking coal in a metal-production process known as "pulverized coal injection," or PCI. That combination gives Yanzhou a nice extra bit of industrial diversification.
  • Third, investors can add geographic diversification to the profit mix as they analyze sector plays.

Provided with these positives, it should be no surprise to investors that Yanzhou’s first-quarter profit more than doubled, climbing more than 112% on surging demand for the fuel and on the higher trading prices seen in the markets around the world.

Uranium: The Long-Term Play

If coal is the short-term solution to the world’s energy needs, uranium is the long-term play.

Uranium-fueled nuclear energy is rapidly re-gaining global acceptance as a clean, reliable alternative to such dirty-burning fossil fuels as coal and oil. In a twin bid to combat global warming and to keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. There are currently 440 nuclear reactors in operation that combined generate about 16% of the world’s electricity. Another 25 are under construction, 38 are on order and 115 are proposed.

Also influencing the supply/demand equation for uranium: There are 284 research reactors in operation and 220 nuclear-powered ships and submarines patrolling the world’s oceans – key facts that many industry analysts forget to include in their calculations.

All those reactors, combined, soak up about 77,000 tons of refined uranium every year. But in 2006, however, only 50,000 tons of uranium was mined. That has forced some countries to run reactors at only 50% to 60% capacity, while others – such as India – have actually been forced to periodically take reactors off line because they lack the fuel to keep running them.

Once imbalances appear, they’re not easy to eradicate. It takes seven to 10 years to transform a uranium discovery into a fully operational mine. With that kind of lag time, it’s clearly almost impossible for supply to keep up with demand.

More than 40 developing countries have recently approached United Nations officials to express interest in starting nuclear power programs, the Washington Post reported.
China alone is planning to build 30 new plants in the next 15 years, a venture that will consume an estimated $50 billion in capital. And that country may require as many as 200 plants by 2050.

According to the Australian Foreign Ministry – with whom China has been negotiating – imports of uranium to China are set to increase from 2.5 million pounds per year to an unprecedented level of 44 million pounds per year. That would be an increase of 1,760%, and would represent close to one quarter of the world’s total uranium supply.

Japan hopes to have 11 more plants operational or under construction by 2010, and the United States and Europe are also jumping back onto the nuclear bandwagon. These new plants will only serve to widen the supply/demand gap.

Clearly, there are substantial dangers from nuclear power plants that are built – and operated – incorrectly. But there also are dangers from coal-fired plants. It’s just that – in an ironic twist – the nuclear fallout is virtually immediate (albeit long-lasting), while the environmental damage from coal takes longer to see.

That said, it’s also become clear that – with the enhancements to plant design and operation – commercial nuclear energy is the safest, cleanest, cheapest source of the massive amounts of electricity that will be needed to achieve three key objectives:

  • To fuel global growth.
  • To avoid a worldwide energy crisis.
  • And to battle the long-term environmental effects of global warming.

That is why uranium has become one of the most coveted and volatile commodities on the planet. Overall, uranium gained 28% in 2007, but that seemingly simple statistic masks a much-more-complex story.

At one point in June, uranium prices were up 84% for the year. But then a mass sell-off – accelerated by the U.S. Department of Energy’s decision to auction off as much as 200 tons of uranium from its own inventory – drove prices from $138 a pound down to $75 a pound in just three months.  

So far this year uranium has skidded even more, reaching its current trading price of about $65 a pound. Despite the dip, however, the underlying fundamentals remain strong, meaning it’s probably the perfect time to start stocking back up on the yellow cake providers.

In a recent research note, analysts with the RBC Capital Markets Group of the Royal Bank of Canada (RY) said that the current spot price of uranium has been "driven to excessively low levels due to intense selling pressure and lack of buying demand, coupled with the typical illiquidity of the spot market."

The RBC analysts also said that "the long-term price, on the other hand, has not changed since May 2007 and we think this better reflects the market’s view of longer-term supply-demand fundamentals."

Prospecting for Profits Among Uranium Miners

So where should you look for profit opportunities? If you look at the charts, some uranium mining company stocks appear to move up and down in virtual lockstep with spot prices.
If you want a pure play on an increase in the price of uranium itself, Cameco Corp. (CCJ) is your best shot. It’s the largest producer of uranium in North America and – despite flooding at its Cigar Lake site last year – Cameco remains the world’s largest and most liquid uranium miner, making it vital to the global supply.

The company’s profit more than doubled in the first three months of 2008, surging 125% on its uranium and gold mining operations.
RBC also likes Cameco’s potential.

"We believe that Cameco will likely continue to be the best name among uranium producers, especially since the water-related risks at Cigar Lake have been reduced recently and it has a top-tier asset base that is in production," the group said. "Cameco’s contract structure should provide the company with increasing uranium price realizations over the next decade."
If you’re looking for more safety and diversification, Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP) could fit the bill.

BHP Billiton is the second-largest commodities company in the world, mining steel, aluminum, copper, iron, nickel, titanium, diamonds and gold. It is also proprietor of the world’s largest uranium deposit, the Olympic Dam in Australia.  When the demand floodgates are finally opened, it’s likely BHP Billiton will be riding the first wave of uranium into China.

Meanwhile, Rio Tinto, the third-largest mining company in the world, is another logical play. The company owns 68% of the Ranger Mine, which has produced more uranium than any other mine in Australia over the past decade.  It also owns Canning Resources, which is the sole owner of two prospective Australian uranium deposits – the Kintyre Project and the Westmoreland Project. 

Rio also owns slightly less than 70% of the world’s longest running open pit uranium mine, the Rossing mine in Namibia, Africa. The company has already started selling uranium to China from the Rossing Mine, so it already has business ties with the world’s largest market.

[Editor's Note: Global investing guru Jim Rogers has been a major commodities bull for several years now. Check out how you can obtain a free copy of his new best-seller, "A Bull in China." Next up in Money Morning's "Cashing in on Commodities" series: Gold.]

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]]> http://www.moneymorning.com/2008/05/20/cashing-in-on-commodities-the-short-and-long-term-solutions-to-the-growing-global-energy-crisis/feed/ 3 While There’s Action in Oil Stocks, There’s Real Energy in Coal Shares http://www.moneymorning.com/2008/02/29/while-theres-action-in-oil-stocks-theres-real-energy-in-coal-shares/ http://www.moneymorning.com/2008/02/29/while-theres-action-in-oil-stocks-theres-real-energy-in-coal-shares/#comments Fri, 29 Feb 2008 12:36:25 +0000 Martin Hutchinson http://www.moneymorning.com/2008/02/29/while-theres-action-in-oil-stocks-theres-real-energy-in-coal-shares/ By Martin Hutchinson
Contributing Editor

Oil prices above $100 per barrel have made the headlines recently, and investment advisors have competed with each other in recommending oil investments.

But here’s some inside insight from the shrewdest investing pros: The true energy play is an energy source whose price has risen more than oil in the last year, and which is located primarily in politically stable, friendly countries – most notably the U.S. market itself.

I’m talking, of course, about that miracle fuel of the 19th Century – coal, the forgotten fossil fuel.

As picturesque as it sounds, I’m not suggesting that if oil runs out by 2050, we’ll be chugging to work in coal wagons – frantically shoveling the black rocks into the firebox trying to build up some steam for the passing lane on the freeway.

Nor can we expect to glide to work in solar-powered yachts, their photoelectric sails gleaming in the morning sunshine [For one thing, London, Los Angeles and other cities around the world would be periodically paralyzed by the smog-induced shrouds that regularly cover these fair cities].

No, if oil runs out we’ll undoubtedly putter to work in a wheeled vehicle that contains a bunch of batteries and something called a “fuel cell” – but the power stations that recharge those batteries will be fueled primarily by coal.

Coal prices have zoomed northward during the past year. The current spot price is around $135 per metric ton, more than double the level of a year ago. For longer-term contracts, Rio Tinto PLC (RTP) is currently seeking a contract price of $135 per metric ton from Japanese power companies for its deliveries in 2008, up 143% from the contract price of $55.65 that was in place for most of 2007.

Indeed, negotiations are under way on new coal contracts that could cause coal prices to double in price this year. The contracts go into effect April 1.

Meanwhile, coal production is running way ahead of forecasts. In 2005, the World Coal Institute reported production of 4,970 million metric tons, up 78% over 25 years. At that point, its 2030 forecast of 7,000 million metric tons seemed reasonable – 44% above 2005’s level, suggesting a modest worldwide relaxation in environmental concerns. However, 2006 saw an 8.8% production increase and 2007 was another excellent year. At current growth rates, the WCI’s 2030 production target would be achieved by 2010.

The main reason for coal’s growth is that 80% of China’s power needs and 65% of India’s come from coal-fired stations. Other alternatives are not big enough to supply their rapidly growing economies. Nuclear power offers its own safety dangers, and nuclear power stations take an extremely long time to construct, while solar power is hopelessly short of the scale needed.

Plans for the world’s largest solar power plant were unveiled Tuesday. It will be built in Victoria, Australia, will cost a mere $270 million, and when fully operational will supply 354 megawatts of power – equal to 0.1% of Australia’s needs, which are modest compared to those of India and China.

Since both India and China are expected to quadruple their power consumption by 2030, most of that increase must come from coal-fired stations. With modern clean coal technology, the new plants’ environmental impact can be lessened, but no reasonable carbon pricing will significantly slow the rapid rise of coal usage.

That’s good news for coal. While oil supplies depend on the whims of governments not necessarily friendly to the United States, coal is abundantly available in countries with a healthy respect for private property, with the United States, China, India and Australia being the top four producers.

Coal stocks have done very well during the past year. Consider the 12-month returns of the following companies, which are U.S.-listed and which specialize primarily in coal:

  • Peabody Energy Corp. (BTU): 51%.
  • Consolidated Energy Inc. (CNX): 126%.
  • Arch Coal Inc. (ACI) 72%.
  • Massey Energy (MEE) 74%.

Among the international players, China’s Yanzhou Coal Mining Co. (YZC) has returned 65% in dollar terms, while Australian-listed Centennial Coal Co. Ltd. has returned 176%.

You can also invest in coal through general mining companies such as Australia’s BHP Billiton Ltd. (BHP).

What’s the best buy? Well, the bad news is that all these stocks have been bid way up. On the basis of trailing earnings, most are trading at a pricey 40 or 50 times earnings [Centennial actually is trading at 440 times earnings]. However, the big jump in coal prices means that earnings are rising rapidly, too, meaning that their “forward” Price/Earnings ratios – those based on earnings for the current year – are in a much-more-reasonable range of 16 to 17.

Of the companies listed, I’d go for two:

  • St. Louis-based Peabody is the world’s largest producer of pure coal, with reserves of 9,000 million metric tons [which have a sale value of $1.3 trillion at today's inflated prices]. At 16 times 2008 earnings, it’s not overly expensive; indeed, given its reserves, its market capitalization of $14 billion makes it look like a bargain.
  • China-based Yanzhou is alluring, in part, because the company is headquartered where the market is. This stock is a little more reasonably priced – at 40 times trailing earnings and 14 times prospective earnings – and has a market capitalization of $9 billion.

The bottom line: Who needs oil companies, with all their political risk and the accompanying market volatility?

The real “black gold” is coal.

News and Related Story Links:

]]> http://www.moneymorning.com/2008/02/29/while-theres-action-in-oil-stocks-theres-real-energy-in-coal-shares/feed/ 1 Outlook 2008: Why Coal – the World’s Forgotten Fossil Fuel – is About to Double in Price http://www.moneymorning.com/2008/02/14/outlook-2008-why-coal-the-worlds-forgotten-fossil-fuel-is-about-to-double-in-price/ http://www.moneymorning.com/2008/02/14/outlook-2008-why-coal-the-worlds-forgotten-fossil-fuel-is-about-to-double-in-price/#comments Wed, 13 Feb 2008 23:46:52 +0000 Jason Simpkins http://www.moneymorning.com/2008/02/14/outlook-2008-why-coal-the-worlds-forgotten-fossil-fuel-is-about-to-double-in-price/ Editor’s Note: This is the 17th Installment of an Ongoing Series Highlighting the Global Investing Outlook for 2008.

By Jason Simpkins
Associate Editor

Over the past several weeks, the price of coal has soared to record highs. But few analysts think the run is over, and some believe that the price of coal could double in 2008. 

Surging global demand and disruptions in supply have resulted in three straight weeks of record high coal prices at Australia’s Newcastle port, a benchmark for Asian demand. Power-station coal prices gained $9.04 per metric ton, or 7.8%, to reach $125.48 for the week ended Feb. 8, according to the globalCOAL NEWC Index.

And the news for coal-users continued to get worse this week.

So-called "spot" prices for the thermal coal used in power generation reached $130 a metric ton this week, boosted by a series of supply disruptions in China and Australia.

The price of coal is up 37% already this year, analysts say. And that’s after coal prices rocketed 73% in 2007, Bloomberg News reported.

GlobalCOAL’s monthly index for Newcastle thermal coal prices rose $1.71 per metric ton, or 1.9%, to reach $90.87 in January, the fourth consecutive monthly record.

The soaring price of coal comes as coal suppliers and coal consumers enter into negotiations on annual contract prices set to go into effect April 1.

Citigroup Inc. (C), UBS AG (UBS), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM), have all raised their forecasts for thermal coal contract prices for the 12 months beginning April 1. Both Citi and UBS think the contract price will double to $100 a ton. JPMorgan thinks the price settled upon will be closer to $90 a ton.

Goldman Sachs raised its contract price forecast for thermal coal to $110 a metric ton, which would be a 98% increase from last year’s agreed-upon price of $55.65 and a 22% jump from its earlier prediction of $90.

Both Citi and Goldman have predicted that "coking coal" – the coal used to make steel – will also double, reaching $200 a metric ton this year, up 104% from the contract price of $98 that’s been in effect over the past year.

The contract prices are lower than the market prices reflected at the Newcastle port because they were agreed-upon at the start of the soon-to-expire contract. Because market prices are not bound by such long-term agreements, they can rise or fall in response to current supply and demand conditions.

Spot prices for thermal coal "have soared in the past few weeks in response to severe coal production and transportation constraints in Australia, China and South Africa at a time when power utilities are holding critically low inventories of coal," Goldman Sachs resource analyst Malcolm Southwood wrote in a research report earlier this week. "We believe that the factors that have driven thermal coal prices higher in recent weeks will have a profound impact on [the] 2008-2009 contract negotiations."

The "Coal Rush"

The catalyst behind coal's record run is all about basic supply and demand. Demand has soared over the past several years, as emerging nations like China and India have undergone a rapid economic and industrial expansion.

"All over the world everyone is looking for coal because all economies are developing … so they need energy … that's why we are in this situation," Exxaro Resources Ltd. (OTC: EXXAY) Chief Executive Officer Sipho Nkosi told the Daily Dispatch.

Coal supplies 40% of the planet's energy needs. Japan - one of the world's largest importers - has been burning through its reserves since an earthquake damaged a key nuclear power station. India has been shipping in more coal, as well, despite already large domestic reserves.

India picked up its coal production by a third over the past decade and half, according to the BP Statistical Review of World Energy, but its consumption has also jumped by a hefty 40% during that period. India counts on coal for nearly 70% of its total energy supply.

Demand even is even burgeoning in the United States, which has several coal-fired electric plants under construction, meaning coal demand might jump by another 50 million tons annually.

However the biggest surge in demand has come from China, home to 1.3 billion people and the world's fastest-growing economy.  Coal provides 78% of its energy needs, and coal demand in China jumped nearly 9%  - meaning it now accounts for a full quarter of the world's annual coal consumption, according to The Wall Street Journal.

China, which used to be a world leader in coal exports, did an about face in the first half of last year, importing more coal than it shipped out.

Five years ago, China exported 83 million metric tons more coal than it imported, The Journal reported. But last year, the surplus dropped to a meager 2 million metric tons.
The surplus decline of more than 80 million tons is equal to 12% of the internationally traded market for coal.

Vic Svec, a senior executive at Peabody Energy Corp. (BTU), the world's largest private-sector coal producer, referred to China's ability to influence the price of commodities as a "butterfly effect."  He told the WSJ that "demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming."

Suicide Squeeze Play

In the face of soaring global demand, the supply of coal has been crimped - and in a big way.

The Chinese government said it had closed 10,412 mines by early January, and has plans to close down 1,100 more.

In South Africa, power shortages and flooding in South Africa have forced the closure of several mines. With such setbacks, the price of coal coming out of South Africa's Richards Bay Coal Terminal, the world's largest, jumped nearly 90% last year.

Several mines in Australia, another world leader in coal production, have also been beset by monsoons and flooding.

Xstrata PLC, the world's biggest exporter of power-station coal said yesterday (Wednesday) that customers could miss deliveries from two mines in Queensland because of rain delays. At least four other Queensland coal suppliers have declared force majeure on deliveries since disruptive weather began taking its toll on the Bowen Basin in January. 

Meanwhile, China, a leading producer and consumer, has been devastated by the worst blizzard of the past half-century. Three weeks of snowfall killed at least 60 people and cost the country approximately $7.5 billion.

Major railways and roads have been shut down, making traffic congestion during the Chinese New Year even more problematic for deliveries last week. As a result, less than 25% of the daily demand for coal shipments by rail has been met in the past week.

About 7% of China's coal-fired power plants have come offline. The five biggest electricity producers shut down 90 power stations with a combined capacity exceeding 20,000 megawatts in northern and central China, according to the State Grid Corp. of China.

Zhu Hongren, a senior official from the National Development and Reform Commission, said that no less than 17 provinces have suffered power shortages and 13 provinces have been forced to ration power. The country has been forced to restrict its coal exports to boost domestic supplies.

"China has probably been the key issue; there's been talk of a complete ban on exports and within that light that's another four to five million tons just taken out of the Asia-Pacific market," Gerard Burg, an economist at National Australia Bank Ltd., told Bloomberg.  "The market was already hot and that added more fuel to the fire."

Also, like its toy-making companies, China's coal-fired power producers have faced an increasing amount of regulatory scrutiny because of environmental concerns. A study conducted by the World Bank concluded that air pollution from coal-fired plants is responsible for more than 400,000 premature deaths every year. That number was subsequently raised to 750,000, just weeks after the report's release.

China is home to 16 of the 20 most-polluted cities in the world. And last year, the nation became of No. 1 emitter of greenhouse gases on the planet - a title the U.S. held for more than 100 years.  

The New "Black Gold"

If you're looking to play the price surge of coal, Money Morning Investment Director Keith Fitz-Gerald has two suggestions.

First, take a look at Yanzhou Coal Mining Co. (YZC). The China-based Yanzhou operates underground coalmines and a railway transportation network for shipping coal. It focuses chiefly on low-sulfur coal products, which are best suited for use in large-scale power plants and in metal production. Low-sulfur coal can be combined with coking coal in a metal-production process known as "pulverized coal injection," or PCI.

In addition to China, this company's customers are mainly in such East Asia nations as Japan, Korea and both Eastern and Southern China.

At yesterday's closing price of $87.86, the stock is trading off its 52-week high of $116.73. Its 52-week low is $41.44.

A good ancillary play on coal is Huaneng Power International Inc. (HNP). Huaneng Power is a major China power producer - meaning it's also a big user of coal.

At yesterday's close at $34.57, Huaneng's share price is near its 52-week low of $31.92 and is well off its 52-week high of $57.50. According to Fitz-Gerald, rising coal prices have played a part in Huaneng's share-price decline.

Fear not, Fitz-Gerald says. China's central government would never allow a major power producer to fail. And the share price will rebound and grow as China's economy advances, he said.

Plus, Huaneng's stock pays a $2.70 a share dividend, giving the stock a yield of about 8%. In a market as volatile as this one has been, owning income-producing shares is crucial for investors who want to maximize their portfolio profits, according to Fitz-Gerald.

This article includes reporting by Executive Editor William Patalon III.

Editor's Note: Money Morning's "Outlook 2008" series last covered Biotechnology. Next up: Sovereign Wealth Funds.

Related News and Story Links:

  • U.S. Department of Energy: Office of Industrial Technologies, Energy Efficiency and Renewable Energy:
    Pulverized Coal Injection
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