4 Commodities Ready To Shock Investors – #1: Coal’s Fundamentals ‘May Be Stronger Than Oil’s’
Submitted by EnergyTechStocks.com
As if the oil price shock that has thrown the world into turmoil isn’t bad enough, there’s reason to believe at least four more commodity price shocks may be headed straight for investors’ portfolios.
First up: coal, the commodity whose supply-demand fundamentals “may be stronger than oil fundamentals,” according to a new report from Raymond James & Associates, the investment banking firm.
Raymond James’ energy analysts conclude that, “Like oil, rapidly growing Asian coal demand has begun to outpace the world’s ability to grow global coal supplies.” While they don’t believe the world is yet at “peak” coal production, they fear a pattern similar to oil is developing that could send prices higher. “(T)he annual coal shortfall has seen an alarming increase over just the past 18 months. Despite a global economic slowdown, the world should see an even greater supply shortfall in 2008” due to supply-demand imbalance compounded by supply interruptions.
This pattern includes coal shipments from South Africa historically destined for Europe instead going to Asia, resulting in European coal consumers turning to the U.S. and South America in search of additional sources. This worldwide scramble for coal will continue, Raymond James indicates, citing a report from coal giant BHP Billiton that in 2007-2008 alone, China constructed new coal-fired power plants with output equal to more than one half of the entire U.S.’s coal-fired generation capacity. Despite China’s own massive increase in coal production, the country presently has 58 coal-fired power plants idle due to lack of coal supply, according to Raymond James.
India, too, has excess demand, and the situation is expected to get a lot worse between now and 2012. By then the country is expected to have about 78 gigawatts of new power plants fueled principally by coal. This will sharply increase India’s coal demand, with “a majority” of the new supply having to be imported, according to Raymond James.
On top of a seemingly insatiable global demand for coal, the Raymond James report indicates that risk of a price shock is rising due also to unexpected supply interruptions caused by weather (i.e., snowstorms in China and flooding in Australia), as well as political events such as state-ordered contract re-pricing in Venezuela. With inventories very tight as it is, the impact of each disruption is magnified in the price shock it causes.
The takeaway here for investors is that, while Raymond James didn’t recommend any specific coal-producing companies, seemingly all of them should do well, especially those with global markets. At the same time, investors should beware the impact high coal prices will have on global electricity rates and, thus, on virtually all manufacturing and service-related business activity.
