For the most part, 2013 has been a glum year for coal stocks,
but the Market Vectors Coal ETF (NYSE:
) has been a strong performer since early August.
That is when KOL found support around $17.50, making a double
bottom formation in the process. KOL has gained 10.2 percent
since August 1, which is great, but the $177.3 million ETF is
still down 23 percent year-to-date, a decline that puts the fund
firmly in bear market territory.
Coal ETF Punished As Walter Energy Sags
Ebullience surrounding KOL and its constituents has been
fleeting at best over the past two years due to
cheap natural gas
and slumping emerging markets demand. Gas prices are still cheap,
but it could be slack developing world demand that again hurts
coal stocks in the near- to medium-term.
While China's economy, the world's second-largest, has been
posting some solid economic numbers as of late, the country's
once seemingly limitless appetite for coal is cooling. China is
often referred to as the 800-pound gorilla in the room for an
array of commodities, but that is particularly true of coal. All
those rosy price assumptions for metallurgical and thermal coal
that were made a few years ago, the very forecasts that compelled
investors to buy KOL and its holdings, were based in large part
on robust Chinese demand.
Due to one of the world's worst pollution problems, China is
looking to shift away from coal to cleaner-burning fuels and that
move comes at a time when KOL's holdings are grappling with a
supply glut and some are dealing with tenuous financial
Last month, Moody's Investors Service raised
its coal sector outlook to stable from
, saying it does not expect industry fundamentals to deteriorate
further "over the next 12 to 18 months, though business
conditions remain very weak."
Weak indeed. Goldman Sachs recently slashed its 2014 price
forecast on thermal coal by 13 percent to $83 per ton,
according to the Wall Street Journal
. China, which accounts for 16.5 percent of KOL's weight making
the ETF's second-largest country exposure behind the U.S., will
probably keep paring its imports of thermal coal, the coal grade
used to generate electric power.
That is because China has plenty of its own thermal coal, and
as a result, UBS expects Chinese coal imports to decline
steadily, the Journal reported.
Making matters more problematic for KOL is that earlier this
month, BHP Billiton (NYSE:
), the world's largest mining company, said demand for
metallurgical coal or coal used to produce steel, is tepid
because of slack demand and supply overhangs.
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Disclosure: Author does not own any of the securities
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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