Coal Stocks, Market Vectors-Coal ETF (NYSEARCA:KOL) were some of the best performers in the S&P 500, according to the Wall Street Journal’s Matt Day today. The industry has often been ignored in recent years as energy related news has centred around high oil prices or low gas prices. Today’s move means stocks in the coal industry should be revalued as the market may have left them undervalued.
Fears about coal’s future, both supported and unsupported have abounded in recent years as the industry is besieged by harsh regulations and relatively expensive mining. The stocks have been buoyed by investors who see a future in coal even though demand from the United States looks like it will be capped by environmental regulations. Coal still has a future in exports to emerging market that do not have the same types of regulations and are still building coal burning power plants. China and India with their rapid growth in energy consumption are leading the drive for such power plants and with oil’s rise in price coal is a relatively cheap option for provision of power.
Many analysts had suggested that coal’s day as a primary source of energy was over as natural gas prices have plummeted. The flaw in that argument is the huge cost inherent in converting power plants so that they can use natural gas to provide electricity. More modern designs of plants have an easier, yet still expensive, path to conversion and many of them have already converted. Older plants are almost impossible to convert and so there is still an endogenous demand for coal that will not be going away any time soon. Unless coal prices are to rise hugely, something that doesn’t seem likely, the increased demand from export and the continuing domestic demand for the energy source will not reach a dead end in the next decade.
Investors may be able to pick up bargains on coal stocks as the market realigns itself with coal’s future. The energy sector is one of the most vital in the economy and coal is still a huge part of it. Domestic demand in the US is probably scuppered for the forseeable future but demand from developing countries is growing. The United States still has a solid coal industry and it should not be discounted based on domestic sources alone. The coal industry has changed, that much is certain, but it hasn’t gone away and isn’t going away. Investors in energy should take note.