may there tis hope- in todays (May 8) SmallCap Network More Stars Align for Coal
Remember how we were starting to fall back in love with coal stocks? We first mentioned the industry was showing signs of life back on April 8th, and have since watched these stocks collectively move higher, making good on their promise of a breakout effort. The Dow Jones Coal Index (DJUSCL) isn't having the best of weeks this week, but the big surge from two weeks gave the group a lot of wiggle room. Translation: Coal stocks are still in an uptrend, and still have a ton of upside potential now that the rebound effort is getting some real traction.
The chart of the Dow Jones Coal Index below tells the tale... we logged a higher low in March [thanks to support at some key moving average lines], and then last week moved on to make our first higher high in years. This week's stumble doesn't negate any of that bigger-picture action.
Well, something came up a couple of weeks ago that bolsters the bullish argument for coal stocks.
First and foremost, this isn't an ironclad undertow yet, but it's likely to happen. What's that? China is very likely to raise its standards on the quality of coal it imports and burns. Specifically, the country is considering a ban on the imports of coal that have a high sulfur and ash content... the bulk of the pollutants made by burning coal.
This is big news because China is the world's largest consumer and importer of coal, importing more than 300 million tons of the stuff in 2013. Of that 300 million tons, about 60 million tons would fall short of the new standard. Folks, that's a paradigm shift.
This is good news for us - domestically - because the United States has the quality coal that's likely to be called for by the new (potential) mandate. Most of the 60 million tons of the high-sulfur, high-ash coal comes from Indonesia. With China unlikely to be able to whittle down its overall consumption, that leaves the United States to step in as one of the key suppliers of coal to China to offset the dirty coal it's been getting from Indonesia.
Now, just so we don't get too far ahead of ourselves, the U.S. isn't the only place China can get this cleaner coal. Australia is sitting on a lot of the "good stuff" too, and it's already got very strong trade ties with China; that puts Peabody (BTU) in a prime position. Moreover, United States coal miners have about 200 million tons of untapped production capacity, so China's new standard still wouldn't bring our coal producers back to their glory days. Still, should this new mandate be put into effect - and we believe it will - this could be a huge boon for our struggling miners.
It occurred to me that the early rumors about China's new coal rules could be what sparked the coal rally a month ago. I don't think that's the bulk of the reason for the rebound, however. I still believe rising natural gas prices are the key reason coal prices and coal demand are on the way up. And yes, I still see this cyclical trend lasting for a while... as in months, if not longer.
We still don't have an official coal pick yet, but I intend to pick up the pieces of this week's pullback and finally scoop one up. I also don't mind letting you know Peabody is on that list.