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Tips for Investing in Coal

In the great game of coal investing, knowing what moves a stock price can be the difference between retiring early and being stuck in a losing stock for years. One of the worst feelings for a commodity investor is being stuck in a stock because you know it’s too late to sell. But it happens even to the best investors.

This figure shows the price of thermal coal for export from Australia over the past 30 years. As you can see, the price of coal is in a long-term uptrend. The Australian export price for thermal coal is the most important to track in today’s market because it exports more than 80 percent of its coal output to bustling markets like China and India.

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From the post–oil embargo years in 1974, the price of coal went down in a steady and predictable way. In the 1980s and 1990s, you could buy and sell coal in a predictable range-bound pattern. You bought low and sold high.

The great thing about coal is that, although it’s not sexy, it’s simple to understand. The reason why the price of coal fell was because companies got much better at blasting the stuff out of the ground. In other words, technology improved. (Today, you see the same sort of trend with falling natural gas prices and fracking technology.)

Real coal prices for Central Appalachian coal, which is traded on the NYMEX, fell from a high of more than $62 per ton in 1979 to less than $28 per ton in 2000, where they found a bottom. Then something strange happened. The price of coal broke out of its 30-year slump and doubled over the next decade — spiking to more than $54 by 2010, as seen in this figure.

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You can find a similar chart on all basic commodities. In 2003, there was a surge of demand from China as well as a construction boom in places as diverse as Dubai, Madrid, and Miami. The global economy was booming. Companies needed both electricity and steel. Coal was in demand, and the price reflected that.

Since that time, the Chinese economy has had a series of ups and downs as it adjusts to the Great Recession and falling demand, leaving investors uncertain about the coal market. Most of the major coal miners lost money in 2012.

But investing in the past is a fool’s game. The questions you have to ask yourself are:

  • What will happen in the future?

  • What will the market look like six months or a year from now?

  • Will China work down its stockpiles of coal?

  • Will more coal miners close down like Patriot Coal did in 2012?

  • Will there be mergers and acquisitions that boost select share prices?

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