Have coal stocks peaked? Is that bubble ready to pop too?

Question

Are the energy price inflators just flocking to oil now? I mean the ones bidding up the prices of these things. Perhaps the remnants of capital they have to work with, can not only be focused on one thing? oil?

Answer 1

Have coal stocks peaked or is the ready to pop?

High prices for coal stocks are driven by coal prices.  It is quite difficult to predict whether stocks are in a bubble or the exact turning point for a burst in a bubble.  Rather the focus here is on the fundamental drivers on whether the increase in coal stocks, driven by high coal prices, is sustainable.

Speaking from an Asia-Pacific perspective, thermal coal has increased from US$50-60/t (FOB) to over $150/t and metallurgical coal has increased from US$120/t to $300/t.

Like most commodities, coal prices are a function of demand/supply.

For thermal coal, demand is expected to exceed supply in the short term with reversion to mean prices in the longer term.

The traditional suppliers of export coal are Australia, Indonesia, South Africa, Russia and South America (Brazil).  Due to freight rates, these countries usually supply customers within their catchment area.  Therefore Australia and Indonesia service the SE Asia market.  South Africa and Russia services the European market etc.

For Australia and Indonesia, demand for coal has caused infrastructure bottlenecks where the rail and port are not sufficient to meet the volume demand.  Work has commenced to address these concern but large scale projects are not expected to come online untill 2010-2012 (New port at Newcastle, Wiggins Island, Port Alma to name a few).  The high prices have seen further development of new mines.  Therefore in the short term supply will not meet demand but as these the bottlenecks are eliminated, supply should meet demand.

Demand for coal remains strong and will continual to be an important source of fuel even in a post carbon trading world.  For example China and Vietnam, traditional exporter of coal have stop exporting and are now importing coal.  Vietnam and China are one the fastest developing nation and new power stations are required to support this economic growth.  All their domestic production of coal are used for domestic power.  Their power stations require more coal than their natural production.  Therefore demand will remain strong.

The confluences of demand exceeding supply support the high coal prices and high profitabilities of coal stocks.  The increase profits have lead to a high valuation for coal companies.  Therefore in the short term we expect these high coal prices, supported by strong profits, to continue until approximately 2012 when the imbalance between supply and demand is addressed.

Answer 2

Coal if anything is under priced. Burning coal to heat is not the only use for it. Coal is essential in the production of iron and steal .There's no slow down in that production. There is and will be increased us of clean burning coal technology. This is only going to increase its demand. Coal will be with us for a long time to come the more this technology comes into use. Coal - gotta love it!

Answer 3

The previous two posters are both correct.  Furthermore, I do expect a correction in the energy and commodity sector as a whole.  The commodity and there corresponding stocks have all been up, some over 100%.  If you look at the demand and supply for energy, I think there is rationale for the price of the commodity to continue to rise.  But I think this short term blast off is premature and likely not to continue.  As you can see from last week coal and steel, which are tied a little together, suffered quite a loss last week.  That may have been the correction it needed or it may still be looming.  I side with the latter.  We will see a correction on both oil and coal before we can see steady growth again.  And since the energy sector is the only winner in this bear market, I expect their final give and move down will signal we finally have hit a floor whereby we can expect a turn for the whole market.

Anyway, I think coal stocks out there are great buys long! As well as steel!