Coal Prices Ready To Burn Hot In 2010?

Ways investors can play this commodity

For most of the past 50 years, since the birth of environmental awareness, coal has been the "black sheep" of the power-production family. Now, thanks to more efficient furnaces, better exhaust-scrubbing systems and other technological advances, coal is regaining favor in the world's energy markets.

However, the biggest factor in coal's recent price surge is steadily increasing demand for the fossil fuel in power generation and steel-making process, abetted by rising costs for other types of fuel, like oil and natural gas.

The question for investors, of course, is will this rising demand continue - and how can you profit if it does?

The answer to the first part of that question is almost certainly, "yes," but solving the second part is a little trickier.

Simple supply and demand

Coal has two primary uses - as fuel for the commercial generation of electricity and heat and for conversion into coke, which is used as both a fuel and a reducing agent in the process of smelting iron ore in a blast furnace to make steel.

Roughly 92.8% (1,041.6 million short tons) of total U.S. coal consumption (1,121.7 million short tons) was used for electricity production at 22 major coal-fired power plants in 2008, the last year for which complete figures are available. Roughly 1.9% (22.07 million short tons) was used in coking, while the remainder was used for other industrial purposes and private and institutional (e.g., hospitals and universities) power and heating plants. On the production side, U.S. coal output rose by 2.2% in 2008 to a record 1,171.5 million short tons, helping fuel a sharp increase in coal exports.

U.S. consumption totals in all sectors were down slightly in 2008 from 2007 - reflecting the relatively mild winter and the sharp economic slump - and numbers for the first three quarters of 2009 showed a continued decline, though preliminary figures for the fourth quarter and the first two months of 2010 show that trend reversing in all sectors but coking, thanks to the record-setting winter weather and a modestly resurgent economy. The continued decline in the coking sector reflects the ongoing loss of U.S. steel production to overseas competitors, most notably China.

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