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Dave & Donald Moenning

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Officer for his Chicago-based Registered Investment Advisory firm, Heritage Capital Management (...

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Does the Election Mean the Death of Coal?

Does the Election Mean the Death of Coal?

Coal stocks and the commodity itself are being hit hard Wednesday on the back of the re-election of President Obama. The Market Vectors Coal ETF (KOL) is currently trading off -5.7% on the day.

The political ramifications relating to coal have become heated over the past several months. The President and Democrats in general have pushed against fossil fuels and have offered no signs of giving up on their anti-coal stance.

On August 12, Republican Senator James Inhofe from Oklahoma said, “The Obama-EPA continues to demonstrate that it will stop at nothing in its determination to kill coal.”

Coal soared from the end of the credit crisis in 2009 until the middle of 2011 as KOL moved from under $12 to over $51. However, since then it has been a downhill slope for one of America’s most plentiful energy sources. The Coal etf has moved down to a low of $21.50 recently and is currently trading at $24.40 Wednesday morning.

However, despite the big decline in coal prices, our research indicates that demand isn’t likely to go away anytime soon. In fact, the opposite would appear the case. According to the BP Statistical Review of World Energy, coal represented 26% of total global energy use ten years ago but today stands at 31% globally.

While coal bashing is in vogue on the political circuit, coal was actually the fastest grow¬ing fossil fuel in the world last year, based on consumption and produc¬tion.

Electricity is the primary driver of coal usage. The Energy Information Administration reports that 90% of all coal usage is for the generation of electricity. Twenty-five years ago, coal generated almost 80% of the electric power in the United States. However, according to the EIA, that number was just 56% as of July 2012.

The reason for the decline, you ask? Natural Gas (UNG) has become a new player in the game due to it being a far cheaper alternative with abundant supplies in the U.S.

 

Is the United States the Key to Coal? Uh, No.

However, the key to the coal story isn’t necessarily the U.S. No, emerging markets (EEM) are now the biggest users of coal and represent roughly 70% of global consumption, according to the BP report. Compare that 70% level to the 38% of global coal consumption the emerging markets represented in 1965.

If you are thinking that this is another “China” (FXI) story, give yourself a gold star as China represents nearly half (49%) of the total coal demand globally. By comparison, China’s total consumption of coal was just 23% in 1987. However, the vast majority of other emerging markets have increased their share of global coal consumption in the last 10 years.

For example India (EPI) has doubled its percentage of global consumption over the last decade and now uses nearly 8% of the world’s supply of coal.

 

What Does This Mean For Investors?

Although coal and the KOL etf are having a tough go of it here, the likely continuation of emerging market use and demand for coal is a primary reason not to give up on the commodity or coal stocks/ETFs as investments. And with the KOL etf near its lowest level since the middle of 2009, this just might be a good time to start nibbling for one’s long-term portfolio.

However, before one runs out and starts buying KOL on margin, it is important to also note that coal remains a trading play on the outlook for the U.S. economy. And with the Presidential election basically becoming “much ado about nothing” as we still have the same players with the same positions in Washington, U.S. stock investors seem to be voting with their feet right now.

In addition to the big declines seen in most commodities (DBC), as of this writing the DJIA (DIA) is down more than 360 points and in full-fledged correction mode. Therefore, it is probably a good idea to “scale into” any long-term positions one may be looking to add at the present time.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted in: Commodities Markets Trading Ideas