Coal as a sector has been beaten down by lower natural gas
prices, muted electricity demand growth, reduced export demand and
the need to conform to the Environmental Protection Agency's (EPA)
Mercury and Air Toxics Standards (MATS) regulations.
The regulations have recently forced many power producers to
announce plans for the termination of coal-fired plants. In fact,
coal prices saw a terrible yearly performance for 2013, falling for
the first time since 2000 (read:
Are Coal ETFs Back on Track?
However, after suffering for a year, coal might breathe a sigh of
relief at least for the medium term thanks to relatively higher oil
and gas prices and relatively lower coal production in 2013.
Near-Term Bullish Price Outlook
U.S. Energy Information Administration
(EIA) forecasts that average delivered U.S. coal prices will be
$2.39 per MMBtu in 2014, up from $2.35 per MMBtu in 2013. A number
of factors can be traced back to this improvement:
Coal as a Substitute Fuel:
Lower natural gas inventories and higher household heating demand
in winter sent gas prices into a rally. Natural gas - almost
by commercial and residential customers - has thus seen a
considerable price rise in the recent period.
Amid these circumstances, a number of industrial and electric
generation consumers sometimes switch over to low-priced coal from
high-priced natural gas thus creating demand for coal.
Tight U.S. Supply in 2013:
As per the EIA, coal production was down 1.8% in the first 10
months of 2013 and was almost absorbed by consumption growth
in 2013. This will leave a short-term supply crunch in the space
thus boosting the price of coal. EIA now predicts coal production
to grow 2.5% to 1,033 MMst in 2014 bolstered by a balanced
inventory outlook and growing consumption.
Notably, consumption surged 4.4% in 2013 thanks to increased share
from the electric power sector. Consumption will likely grow 2.2%
next year, as per the EIA (see
the Top Ranked ETFs here
As the majority of the developed markets came out of recession and
the U.S. economy too remains on the growth path, output from
industrial sectors are poised to gear up. This will also trigger a
certain level of global coal demand especially when coal is a key
input in the steel industry. Investors should note that, nearly 70%
of global steel production depends on coal.
Growing Asian Demand:
As per the PIRA Energy Group - a leading energy marker researcher,
Chinese electricity demand expanded considerably in the recent
times leading to the strong demand for thermal generation. In spite
of being the
world's largest producer
of metallurgical coal, China continues to import seaborne coal due
to flat domestic production.
Yet another global energy and mining research company -
- forecasted that the seaborne metallurgical coal market will
likely grow 51% by 2035 from the levels of 2012. As much as 69% of
this demand will come from Asia while the Atlantic market will
account for the rest.
Modest Sector Recommendation
: To add to this, Moody's had upgraded its coal industry outlook to
stable from negative in August 2013, helping some to feel a little
less bearish on the space (read:
Coal ETF in Focus as Moody's Upgrades Sector
). Higher demand for the thermal coal segment through
mid 2014 to early 2015 and supply rationalization in metallurgical
coal used for steelmaking were the drivers of this upgrade.
The Zacks Industry Rank, which relies on the same estimate
revisions methodology that drives the Zacks Rank for stocks,
currently puts the Coal industry at 152 out of 259 industries in
our expanded industry classification. This puts the industry in the
middle one-third of all industries, corresponding to a neutral
How to Play
There is only one ETF, namely
Market Vectors Coal ETF
), which offers a pure play on the U.S. coal industry. The ETF was
down about 20% in 2013 but performed quite well to close out the
Launched in January 2008, KOL tracks the Stowe Coal Index,
providing exposure to the companies related to the coal industry.
Even though this index has a global focus, nearly 45% of its
investments are directed toward U.S. companies, followed by China
with a 17% share.
KOL amassed an asset base of $168.3 million and charges 59 basis
points in fees annually. This fund holds 31 stocks and the top 10
companies holds 57.9% share of total net assets. Top three holdings
Consol Energy, China Shenhua and Joy Global make up for about 21%
of the fund (see more in the
The fund is currently trading a little higher than its 52-week low
which leaves room for rally as long as broad trends hold up well.
The Fund's Relative Strength Index is 51.04 currently thus
indicating that KOL has way to go to enter the overbought
While KOL currently holds a Zacks ETF Rank #4 (Sell), the valuation
has perhaps bottomed out and can call for a trend reversal. KOL has
greater share invested in mid-and-small caps thus having potential
to bounce back in a trending U.S. economy.
However, the risk quotient of the fund is high; be it in the form
of concentration risk or currency risk (as about 50% of assets
exposed to foreign currencies). Still, KOL could be due for a
bounce back this year.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
MKT VEC-COAL (KOL): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report