As we’ve told you before, coal isn’t the best long-term bet in the energy market.

Over the long haul, it’ll continue to be marginalized by natural gas, which is cheaper, cleaner and readily abundant in the United States.

But even though coal’s long-term outlook is somewhat bleak, it’s the hottest short-term play in the energy market today.

[ad#Google Adsense 336×280-IA]Remember, coal still accounts for 90% of China’s energy supply, and India isn’t far behind.

And it’s still the main fuel of choice in the United States, where it accounts for about 44% of our electricity – a higher percentage than natural gas.

So while natural gas is the future, coal is still very much the present.

And since prices have plunged 50% over the past few years, it’s incredibly cheap.

So cheap, in fact, that the added costs associated with its environmental impact have been reduced. Coal is now as economical as it’s ever been.

Indeed, coal prices have already started to bounce off their lows. And they’re poised to climb even higher from here.

There are two reasons for this:

  • First, the economic growth is stronger than it was five years ago – it may be anemic, but it’s still there.
  • And second, the resurgence in natural gas prices, which are up 100% over the past year, has leveled the playing field.

However, the biggest opportunity here is not in coal itself, but rather the companies that produce it. Companies associated with coal have seen their share prices decimated over the past few years. Some are down more than 70% from their highs.

This has led to rationalization in the sector. In other words, these companies are now focused on cutting costs, running efficient operations and closing economically unfeasible mines. It’s the economic version of “natural selection.”

I expect that rationalization to continue because, to be blunt, there’s no other choice.
Coal is where copper was a few decades ago when prices were so low that producers stopped producing after continuous losses. Once the market recognized this, it sent copper prices, and copper stocks, to the moon.

I don’t expect any moon shots in the coal sector, but double- and even triple-digit returns over the next two to three years are a very good possibility. Especially considering the magnitude of the selloff and the potential for economic recovery.

The company that intrigues me the most right now – and there are plenty to choose from – is Walter Energy (WLT).

As a producer of coking coal, which is used in steel production, Walter’s stock is down 80% over the past 52 weeks. Yet, the company itself isn’t in bad shape. It has a nice cash cushion, and it’s beginning to see demand start to rise a little.

The main reason for that is a fledgling revival in the auto industry, particularly in the United States and Japan. And obviously, it takes quite a bit of steel to manufacture cars and trucks.

Indeed, U.S. vehicle production is much higher than it was during the depths of the financial crisis. Vehicle sales are on track to reach about 15 million units this year, up from 10.4 million in 2009. As a result, many domestic manufacturers are ramping up production to meet demand.

Meanwhile, Japan is ramping up its stimulus measures, and devaluing its currency. That will lead to higher vehicle production there, as well.

Bottom line: Coking coal prices tend to follow economic cycles, and if we’re entering an upward cycle, then prices should follow.

That’s good news for Walter, and other companies in the sector trading at historically cheap levels.

Perhaps that’s why Walter insiders have been buying shares in large quantities for the first time in years. If I were a betting man, my money would be on the insiders and the resurgence of the coal industry… for the short term, at least!

And “the chase” continues,

Karim Rahemtulla


Source: Oil and Energy Daily