Coal ETF Investing 101
Coal Industry Outlook
The increasing demand for utility services, particularly for electricity, is a primary driver for the demand of coal. Coal remains a dominant source of power generation worldwide. In the U.S. around 40% of the total power generation capacity is coal fired.
As per the World Coal Association (:WCA), proven global coal reserves will last nearly 112 years at current production rates. On the other hand, proven oil and gas reserves are projected to last around 46 years and 54 years, respectively, at current production levels. Asia is the biggest coal market and presently accounts for 67% of the global coal consumption. (Read: Oil ETFs Surge on Strong Data)
Metallurgical coal or coking coal is used in steel production. So, the improvement in steel industry fundamentals improves the prospects of the premium variety of coal. The World Steel Association projected about 3% year-over-year growth in global steel usage in 2013 and 2014.
Despite the demand of coal for power generation and in other industries, there is an increasing global concern towards the emission of green house gases. President Obama’s Climate plan, which aims to lower carbon pollution in America, could impact the future prospects of the coal companies. (Read: Behind the surge in wind power ETF)
The President’s Climate plan calls for implementation of carbon pollution standards for both existing and upcoming coal-fired units that in a way could make coal-fired units more expensive and less attractive for operators. The electricity generators, in order to avoid the stringent regulation, could decide to erect power plants using natural gas or alternate sources, which will lower the demand for coal and impact the future profitability of U.S. coal companies.
However, with prices of natural gas going up in the U.S. and the expected surge in coal-fired units globally in the next few years, the demand for coal may improve. Second quarter earnings for the coal industry started on a positive note with Peabody handsomely surpassing the market expectation, resulting in a corresponding surge in coal ETF. (Read: Coal ETF Surges on Peabody (BTU) Earnings Beat)
Market Vectors Coal ETF (KOL) in Focus
KOL tracks the Stowe Coal Index, providing exposure to companies related to the coal industry. Even though this index has a global focus, nearly 46% of its investments are directed towards U.S. companies, followed by China with a 13% share.
The Coal Index comprises companies that generate at least 50% of their total revenues from any form of coal related activities. The activities range from production and mining, coal transportation, production of coal mining equipment as well as coal storage.
The ETF launched in Jan 2008 presently has an asset base of $156.6 million. This fund holds 34 stocks and the top 10 companies hold a 58.73% share of total net assets.
The average daily volume is about 130,000 shares and the fund has a dividend yield of 2.32%.
Among individual holdings, top stocks in the ETF include CONSOL Energy Inc, China Shenhua Energy Company Limited, and Joy Global Inc. comprising 8.31%, 7.99% and 6.93%, respectively, of total net assets.
To Sum Up
Future prospects of the coal industry in the U.S. will be tied to shipments besides domestic demand. China and India are going to be the two major importers of coal. However, in the U.S. coal continues to lose its ground to other fuel sources for power generation.
Per the U.S. Energy Information Association, coal will continue to be the largest source of electricity generation, but its share in the pie, which was 51% in 2003, would decline to 35% in 2040. Renewable energy sources and natural gas powered units will be the main beneficiary of this lost ground. Even with its decreasing usage, coal will remain as a major source of power generation in the next few decades.
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