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Monday, 5 May 2008

Steel is getting more expensive so invest in Coal

As if most people are not struggling enough with the increases in Gas and Food prices which I wrote about here (Higher Food Prices) but the latest blow comes in the form of increases from the utility companies to the price of your electricity.

In a recent article the Associated Press writes "NEW YORK (AP) — "Consumers struggling with high gas prices, rising food costs and falling home values have something new to worry about: Sharply rising electricity rates due to a surge in coal prices over the past year."

As the article highlights the increase in the price of coal has meant that there have been hikes by the utility companies in the price of Electricity to the end user.One of the main reasons for the increase in coal prices is the demand from emerging countries(yes China again !!)ironworker for coal to fire their increased demand for Steel.

U.S. coal exports jumped 19.2 percent last year, according to the Energy Department, and are expected to rise another 15 percent this year.

"As more of the world develops and uses more energy, and supply tries to keep up with demand, we're going to have these pinch points," said Carol Pfeiffer, director of fuels for the U.S. for utility giant E.On AG.

Coking coal is the type of coal used in steelmaking. Demand from steelmakers is driving prices higher. In fact, many steelmakers, including the world's second-largest producer (Nippon Steel), recently agreed to pay triple what they previously paid for coking coal.


Price of Coal

The chart above shows the price of coal over the last five and a half  years up an  450%.The above index doesn't contain any U.S. coal – it's 60% South African, 30% Colombian, and 10% Australian. But the market for coal, like oil, is global. When the price of foreign coal spikes, the U.S. exports more of its coal... resulting in higher U.S. prices.There are a limited number of ways to bet on the price of coal but you can do it mainly through coal stocks... but they are expensive right now.A few of the big names are Peabody (BTU), Consol (CNX), Massey (MEE), and Arch (ACI).

My favourite play would probably be buy a basket of coal producers with the Market Vectors Coal ETF (KOL).Currently prices are high and I would wait for a pullback maybe to around the $43 dollar level at support before considering a purchase. There is no doubt that high energy costs are here to stay whether the cost of our gas in the tank or the price of our electricity one way to mitigate the impact is by buying the companies an sectors that will benefit from us paying them more.


Best Wishes