Are Coal Stocks Lit Up?
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Even though coal usage is falling in the United States and stagnant globally, coal stocks are soaring in recent market action. Peabody Energy (NYSE: BTU), the world's largest private sector coal company in the country, is up 17.33% for the last week and 10.44% for the last month of trading. Year to date, Peabody Energy is off by 20.67%. James River (NASDAQ: JRCC), a small cap coal producer with a short float of 34.62%, has soared by 34.94% for the last week and 55.13% for the last month. For 2012, James River has fallen by 47.54%. Market Vectors Coal (NYSEMKT: KOL), the exchange traded fund for coal, is down 19.63% since January 1 but up 10.11% for the last week and 9.23% for the past month.
Due to lingering economic weakness in the United States, hopes for more quantitative easing to stimulate growth are firing up energy stocks, particularly coal. The weak jobs report for June was just more proof that the economic recovery in the United States is anemic, at best. Quantitative Easing 2, from November 2010 to June 2011, sent the share prices of energy company equities higher due to speculative effects. Quantitative Easing 2 consisted of the Federal Reserve inflating its asset sheet to acquire about $700 billion in US Treasuries to underwrite the budget deficit for the United States Government.
As of result of this, the price of the United States Dollar, PowerShares DB US Dollar Bullish, dropped as investors sold Greenbacks and piled into hard commodity assets, especially SPDR Gold Shares (NYSEMKT:GLD) and United States Oil (NYSEMKT:USO). The prices of securities for coal rose for two main reasons, neither having anything to do with basic fundamental supply and demand issues that will determine the value of any asset over the long term.
The first was the increasing attractiveness of commodity assets such as coal and oil as opposed to paper assets such as the United States. The other is that when oil rises in price, coal becomes more attractive as an alternative energy source. From the summer of 2010, when Quantitative Easing 2 was announced by Federal Reserve Chairman Ben Bernanke at the Jackson Hole economic policy summit, to when it ended in the summer of 2011, United States Oil rose from trading in the low $30s a share to the mid $40s, about a 50% increase in price.
Over the same period, Market Vectors Coal soared from under $30 a share to more than $50 in the spring of 2011. Peabody Energy surged for the same time span from the mid $30s to over $70, more than doubling in price. James River Coal Co doubled over that period to about $27 a share, a far cry from its present range under $3.70.
There has not been an increase in coal demand around the globe to send prices soaring. Joseph Czul, President of Logan & Kanawa, a James River subsidiary recently stated that, "Worldwide demand for metallurgical coal remains stable. In aggregate, our customers require about the same volume of met coal in 2012 as was consumed in 2011."
In the United States, coal usage is plunging. The amount of electricity in the United States that is produced by coal has fallen to below 40%, the lowest figure since the government started collecting data in 1949. Four years ago, its was 50%. According to an Associated Press article by Jonathan Fahey, "By the end of this decade, it is likely to be near 30 percent."
The lower price of natural gas is what is causing the decline in coal usage, according to Fahey's Associated Press piece. High hopes for Quantitative Easing 3 are leading to the jump in prices for coal securities such as Peabody Energy, James River Coal and the Market Vectors Coal exchange traded fund. There is no greater demand or shortfall in supply to lead to such a surge in recent market action.
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