Daily Gains Letter

Coal: The Next Great Long-Term Play?

By for Daily Gains Letter |

Long Term PlayWhen it comes to global energy production, the United States will be the top dog in a few short years. Back in November, the International Energy Agency (IEA) forecasted that the U.S. would overtake Saudi Arabia as the world’s top oil producer by 2017.

Over the last week, two more reports have positioned the U.S. as an even stronger near-term energy giant. The IEA said the U.S. will surpass Russia as the biggest non-OPEC producer of oil and natural gas in 2014. (Source: Harrison, V., “U.S. to pump more oil than Russia in 2014,” CNN web site, October 11, 2013.)

Over the last two quarters, the U.S. has produced more than 10 million barrels per day—its highest output in decades. Thanks to increased production in the Bakken oil field in North Dakota and the Eagle Ford shale formation in South Texas, U.S. production of oil and natural gas liquids will exceed 11 million barrels per day by the second quarter of 2014.

Perhaps more interestingly, it was announced earlier this week that coal is expected to surpass oil as the world’s primary energy source by 2020. Despite President Obama’s best efforts to reduce U.S. carbon emissions and phase out our dependence on coal, it looks like the fossil fuel is going to continue to be a major energy source. (Source: “World Coal Consumption To Surpass Oil By 2020 Due To Rising Demand In China And India,” Huffington Post web site, October 13, 2013.)

In fact, global coal consumption is expected to rise by 25% by the end of the decade to 4,500 million tonnes of oil equivalent, surpassing oil at 4,400 million tonnes. China, already the top consumer of the fossil fuel, will drive two-thirds of the global demand as it looks for cheaper energy sources to propel its economy. India isn’t far behind.

Many sources claim the demand for domestic coal is in a downward spiral. Not so: demand in the U.S., Europe, and the rest of Asia is expected to hold firm for now. Right now, coal is responsible for generating about a third of all electricity in southeast Asia; that number is expected to rise to nearly 50% by 2035.

Yes, many countries around the world are keen on shifting their strategies away from non-renewable energy sources, like coal, toward cleaner energies, like wind and solar. Demand for the inexpensive fossil fuel will also face added pressure from regulations on water supply, carbon emissions, and air quality. But the fact of the matter is that it’ll be a long, long, long time before the world chooses to wean itself off this plentiful, inexpensive energy source.

Especially when you consider that 41% of global electricity is generated by coal. In South Africa, it accounts for 93% of production; China, 79%; India, 68%; the U.S., 45%; and Germany, 41%. (Source: “Coal and Electricity,” World Coal Association web site, last accessed October 16, 2013.)

Also consider how expensive and difficult it is to reconfigure national infrastructures. China shows no signs of slowing down; half of its power generation capacity built between 2012 and 2020 will be coal-fired. This discredits claims that China’s demand for the fossil fuel will peak in 2020.

The Market Vectors Coal ETF (NYSEArca/KOL) tracks the Stowe Coal Index, providing exposure to companies that generate at least 50% of their total revenue from any form of coal-related activities. Its biggest holdings include CONSOL Energy Inc. (NYSE/CNX) at 9.02%, China Shenhua Energy Co. Ltd. (OTCBB/CSUAY) at 8.05%, and Joy Global Inc. (NYSE/JOY) at 6.83%. The fund also provides an annual dividend of 2.22%.

Granted, many environmentally conscious investors may not want to consider adding coal mining companies to their retirement portfolio. But for those investors for whom retirement is a long ways off, this inexpensive and plentiful energy source may be a solid long-term play.

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