By Chris Mayer
July 23, 2010
The market fell out of bed on Friday last week, erasing its gains for
the week. Overall, since tanking after those April highs, the market
has created some interesting opportunities. One of those is coal…
As far as I know, despite concerns over slowing industrial
manufacturing, China will still need coal. In fact,
Barron’s
ran a piece over the weekend titled “China Still Needs Coal.” The lead
began this way: “Booming Chinese demand has lit a fire under
Asia-Pacific coal stocks and triggered talk of a lengthy supercycle in
the region’s dominant fuel. Everywhere, that is, except in China.”
The author points out that China’s leading coal stocks are all down
25% or more of late.
The worries — as far as the genuine China coal miners go — were not
without some basis. China, foolishly, told its miners to keep prices
stable. The market read this as a de facto price cap. But that doesn’t
affect all of the coal companies…
China consumed 47% of the world’s coal last year. The growth of that
demand has been mind-boggling — so much so it is hard to wrap one’s
mind around it. I wrote about this recently in
Capital & Crisis.
In 2000, China consumed as much coal as the U.S. Today, it consumes
three times as much as the U.S.
As I wrote in
C&C, quoting Richard Heinberg at the Post
Carbon Institute:
“China will be pressed to produce the coal
it needs domestically. In fact, after being self-sufficient in coal
for years, China has begun to import coal. This year, it will import
150 metric tons, which is double last year’s total. It may seem a
molehill compared with what it burns, but that molehill is about 60%
of Australia’s coal exports — and Australia is the world’s largest
coal exporter — and growing.
“This means if China imports double again
next year — not an unrealistic scenario — China will need to import
more coal than Australia can currently provide,” Heinberg notes.
“One more doubling of import demand and China will be wanting to
import 600 million tons per year, about the total amount of coal
exported by all exporting nations last year.”
These are good reasons to get long coal, and
I have a few speculative favorites.
One is based in Mozambique. Now, this is not a country one would think
to invest in offhand. But Mozambique is home to one of the largest
unexplored coal basins in the world. It is a speculative gumbo,
because it is still early in the game and Mozambique ain’t exactly
Canada.
I’ve been researching the Mozambique story. The Economist had
a piece recently about it, which I really enjoyed, called “A Faltering
Phoenix.” Here’s how the story kicks off:
“About two hours’ flight north of Maputo, the Mozambican capital, lies
the town of Tete on the crocodile-infested banks of the Zambezi River.
A narrow suspension bridge forms the only crossing point for the main
trade route linking landlocked Zimbabwe, Malawi and Zambia. Until a
few years ago, Tete was no more than a dusty down-at-heel stopping
point for weary lorry drivers. But now, thanks to massive foreign
investment in what may be the world’s biggest unexploited coal field,
it is fast becoming a bustling boomtown, already boasting three banks,
three car-hire companies, half a dozen decent hotels, an international
school and a new airport with twice-a-day flights to Maputo.”
If you are fan of old explorers and adventurers, as I am, you may
recall the Zambezi River. Between 1853-56, David Livingstone — of “Dr.
Livingstone, I presume” fame — led a majestic journey across Africa
following the line of Zambezi River. Author Tim Jean writes, Dr.
Livingstone “suffered 27 attacks of malaria and almost died at the
halfway stage.”
But I digress. Mozambique has been mostly wrecked by civil war.
Infrastructure is bad, but there are railways reopening and bridges
going up with the aim of knitting Tete to the port of Beira. Tete, as
the above quote makes clear, is a boomtown in the heart of coal
country.
Here is a helpful map, courtesy of The Economist:
Mozambique already has a large hydroelectric plant. If you are going
to build mines, you need a reliable power source. This is lacking in
much of Africa. There is more on the way in Mozambique, thanks to the
inflow of foreign investment. There is a scramble now to lock down
coal deposits and to make deals. The South Africans are the biggest
investors in Mozambique. The Chinese are second.
But don’t forget the “faltering” part of this phoenix. The Economist
points to the many problems in Mozambique. Desperate poverty.
Corruption. Crime. And international aid is more than half the total
state budget. It’s not an easy place to do business.
Anyway, the company I’m looking at has a potentially lucrative coal
deposit. The stock has held up pretty well in this storm. I was hoping
it would get knocked down. Nonetheless, the other coal miners I have
on my radar right now, this is a speculation. As such, it’s not a name
that I can release to all 400,000 Penny Sleuth readers
without artificially inflating its share price. I’m going to have to
keep it
reserved for my own readers (naturally, there’s nothing keeping
you from becoming one of them – right now,
you can do it for just $1)…
[Ed. Note: If you want to take Chris’ theme and run
with it, there are a couple of ways you can go long coal right now –
like the PowerShares Global Coal Portfolio ETF (NASDAQ: PKOL)
or the Market Vectors Coal ETF (NYSE: KOL). Both of
these funds own a basket of coal equities, not the commodity itself.
Still, to take advantage of the speculative potential of Chinese coal
right now, you’ll need to invest in something less diversified.]
Sincerely,
Chris Mayer
P.S.: Naturally, I’ve got a lot more on my plate than
just coal – in fact, I’ve been looking at some incredibly exciting
Chinese companies too. Right now, you can get
all of my investment research for just $1. This offer won’t last.
Act now.
[Independence Note: Unlike scores of other penny
stock resources, we’re 100% independent from the companies we talk
about in the Sleuth – that means that we never accept
compensation in exchange for profiling a company, and our editors
never own a position in any stocks they talk about.]
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