Thermal coal was one of my big themes in 2013. And I believe 2014 will be the year when we see a significant break-out in this market.
Both for the commodity itself. And the companies that produce it.
As I’ve discussed, exploding thermal coal demand in India is the big driver for this story. With India’s imports turning in a record-setting year in 2013.
But it’s becoming clear there’s much more to this story.
A number of recent events show that coal demand is staying strong. In some surprising parts of the world.
These developments are very encouraging. Suggesting that the fundamentals in the thermal coal market are even better than I initially believed.
From price rises to production cuts, here are the “need to know” happenings in the space right now.
Japanese Buyers Pay Up For Supply
The biggest thing weighing down investor sentiment in the coal sector lately has been prices.
Since 2011, thermal coal prices in the Pacific sphere have fallen to as low as $75 per tonne, down from $140. And there was concern that oversupply could push rates even lower.
But those fears today look misplaced. Prices have stabilized in the range of $75 to $85 per tonne. Trading within this bracket for the last six months.
If investors needed confirmation that prices have bottomed, they got it last month from coal buyers in Japan.
Tokyo Electric Power Company (Tepco) has been meeting with major coal miner Xstrata over the last few weeks. To determine Japan’s purchase price for coal in 2014.
Emerging reports suggest that the rates will be favorable to miners. With sources suggesting that coal supplies from Australia will be pegged at $87.40 per tonne. Up slightly from the $85.80 per tonne that Japanese buyers agreed on during the last round of negotiations.
It’s not a big increase—but it does show that prices are leveling. Meaning the worst appears to be behind us in terms of pricing downside. Potentially setting the market up for gains ahead.
India’s Import Demand Is Only Getting Stronger
Coal imports in India had yet another strong month in November. With total shipments of thermal coal coming in at 11 million tonnes.
That performance now puts India’s total imports during the fiscal year (which began April 2013) at over 90 million tonnes. Already higher than India’s imports for all twelve months of the previous fiscal year.
If the current pace keeps up, India will import around 140 million tonnes of thermal coal in fiscal 2014. An astounding 50% increase from last year’s levels.
That’s the kind of growth that should be making headlines worldwide. And yet you hear very little about it.
Mostly because numbers on India’s coal imports are not easy to find. While most governments publish regular and reliable figures on coal imports, India is an exception. Government stats here are hard to come by—and often incorrect when compared to actual numbers from industry.
But one source does provide reliable data—reports from shipping companies. The people who bring the coal into the country.
Piecing together such data, we get the figures above—suggesting that India’s imports are in fact soaring. Right under the nose of most analysts in this space.
Thus, the India story may catch a lot of people by surprise during the coming year. Potentially making the resultant rise in prices and coal stocks even stronger—as buyers scramble to re-position ahead of this bullish trend.
Growing Demand From Unexpected Sources
Most analysts believe that the developing world is the main driver for coal demand.
After all, most developed countries are moving away from “dirty” coal power. Tapping into cleaner energy sources like natural gas or renewables. Right?
Not really. In fact, it’s looking like some developed nations could be the biggest drivers for coal demand going forward.
One of the big ones being Japan.
In November, the Japanese government officially admitted it needs power sources like coal—when the nation abandoned greenhouse gas reduction targets it had set under the Kyoto Protocol.
The country’s new goals for carbon dioxide abatement are much more lax. Partly because of big plans to build out coal-fired power infrastructure.
Some of those plans are already coming to life. Japanese utility Tepco is right now commissioning two new coal plants—Hitachinaka no. 2 and Hirono no. 6—with total combined capacity of 1,600 MW.
Units like these need a significant amount of coal supply. Which is why Japanese monthly coal imports have been hitting record levels of late.
That trend is only going to continue. With Japan’s nuclear fleet still mostly offline, the nation needs power supply in a bad way.
And even if nuclear plants do come back to life, you can bet officials will be intent on cultivating alternate power sources—as insurance against future outages.
The Best Place to Be an Investor
One of the keys to investing success is finding niches where you have little competition.
The fewer eyeballs there are on a sector, the better the chance of finding undervalued investments poised for gains.
Usually that means finding businesses or industries most investors haven’t thought of yet.
But sometimes these opportunities come in sectors where most people simply can’t invest.
Coal is looking like one of those spots today. Coal stocks have become nearly as vilified as tobacco makers—with numerous activist investor groups pledging to avoid the coal sector entirely.
Last month we saw another high-profile investor pull out of the space. The U.S. Export-Import Bank—an entity that in the past has provided billions in funding for coal mining and power projects around the world.
But no more. The Bank officially announced it will discontinue funding in the coal space. All part of an effort to align more closely with White House policies on clean energy.
This is bad news for developers of coal projects. But a great development for investors.
Those funders who do remain in the coal space are going to have little competition. Meaning they’ll be able to demand very favorable terms for their money. Increasing the likelihood of big returns.
I also believe that outflows of investor money from the coal sector have pushed many stocks to significant undervaluations. Firms like Peabody Energy (NYSE: BTU) and Exxaro Resources (OTC: EXXAY) have seen their share prices run down to very attractive levels over the past year. Giving investors a great buying opportunity—in a sector that looks poised for a very bright year in 2014.