COAL
caused by China’s inadequate rail capacity, resulting in a dramatic increase of road transportation which is costly and already strained. This is likely to increase production costs and remain a constraint to further expansion. Australia – the largest exporter of
coal – has recently approved the use of a carbon tax, to be implemented in mid-2012, with a smooth transition within three to five years to a cap-
In addition to the factors limiting supply, the vast reserves
of the world’s coal are mainly of the lower-quality bituminous variety, more difficult to mine in terms of time and cost, further giving rise to the importance of a long term investment in coal.
The ‘Pure Play’ ‘Pure play’ involves investing in a company devoted to one line
of business or a company whose stock price is highly correlated with a specific business. For example, investors seeking exposure to coal markets could purchase shares in Peabody (the US’s largest coal mining company) thereby making a pure play in the coal mining business. An exchange traded fund (ETF) can also be used
as a pure play on coal. These are typically passive investments that trade on an exchange. And ETFs can be purchased via a single transaction. The advantages of this include cost effectiveness since there is only one transaction per trade. Furthermore, ETFs require minimal management as their aim is to track an index rather than outperform it; therefore, risk and management fees are lower. An ETF such as Market Vectors Coal ETF (KOL) or
PowerShares Global Coal ETF (PKOL) provides investors with exposure to a global universe of listed companies engaged in the coal industry, including Peabody Energy, Alpha Natural Resources and CoalCorp Mining. Coal ETFs not only provide exposure to the industry but help investors achieve diversification.
Standing the Test of Time Given that last year was difficult for coal stocks – as evidenced by dramatic falls in a number of coal
and-trade system. As a result, any coal mine expansion plans are expected to be axed, further pressuring coal supply. The notion of a shortage of coal
is frowned upon given the widely held misconception that current coal reserves will last for another century.
mining company stocks – it may be the entry point for investors with a long term outlook on the sector. The challenges the coal industry faces in the long term will be
determined by the expansion rate of environmental conservation efforts, improvements in the production and mining in the coal industry, and the adoption rate of renewable energy resources. Despite these challenges, the benefits of coal – ample supply,
Energy Watch Group ... has estimated that China will experience peak coal by 2015
The US – the ‘Saudi Arabia of coal’
– has experienced peak extraction of high quality coal such as anthracite since the early 19902. Higher quality coal produces more energy and is easier to mine. The Energy Watch Group – a German organisation that undertakes studies about worldwide availability of fossil and nuclear energy resources – has estimated that China will experience peak coal by 2015.
56 March 2012
cheapest form energy, ease of extraction and contribution towards the labour market – should not be underestimated. The expected tightening of supply and rising demand for coal, coupled with a more positive macro outlook, only strengthens the appeal of
coal as a long term investment. In any investment portfolio, an allocation towards a stable
investment should always be considered – and commodity investing is no different. Investors seeking a stable commodity that will stand the test of time may ‘call to coal’ as a way to maintain some stability in a portfolio. •
Yasin Ebrahim is an investment professional.
His background is in Risk and Investment Management coupled with leading industry qualifications; Financial Risk Manager
(GARP), Chartered Alternative Investment Analyst (CAIA); and Investment Management Certificate (CFA UK).
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