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Amid all the worries about credit markets and financial derivatives, an interesting development in the ‘real’ economy may have escaped your notice.
For all the talk of green energy and burning less fossil fuels, the soaring oil price has made one abundant, old-fashioned, and defiantly dirty fuel source look considerably more attractive.
We’re talking about coal. In fact, so attractive has it become, that we may soon see coal mining make a return to the valleys…
It seems that becoming a coal miner may once again become a viable career ambition for the young of Wales. Two mines that have been shut since the mass closures of the 1980s are set to reopen shortly.
The restarting of the Aberpergym and Treforgan mines in South Wales will be funded by the flotation of Energybuild on Aim, which listed yesterday. The mining group is already producing coal from an opencast mine, supplying an RWE-owned power station in the Vale of Glamorgan.
It’s becoming economical again to supply power stations with home-hewed coal, because of a strong surge in coal prices. According to the McCloskey coal consultancy, the price for world coal delivered to the UK was $102 per tonne last month, compared to $74 last July.
Now coal’s always been important. It accounts for a quarter of global energy consumption, compared to nearly 40% for oil. More than half of America’s electricity comes from coal, while a full 80% of China’s does.
But what’s driving the current revival? One factor behind the recent strength in the price has of course been high oil prices – the drive to find cheaper sources of power has been a boon to alternative fuels across the board. And it’s not just about burning coal in power stations. Coal can also be converted into liquid fuel – this technology was used by South Africa under apartheid-era sanctions, but it is now becoming of wider interest. Coal to diesel technology is thought to be cost-competitive at oil prices of around $35 to $40 a barrel. China is pumping $15bn into the industry and aims to replace 10% of its oil imports with coal-liquefied oil by 2013.
There’s also the question of energy security. At the moment, much of our oil comes from parts of the world that are volatile, to put it politely, and in many cases downright hostile. This wouldn’t be a problem if we could somehow replace oil with coal. America has such abundant reserves of the black rock that some have described it as “the Saudi Arabia of coal”.
And of course, there’s the huge economic boom in the east, and particularly China, which has driven the price of almost all raw materials higher. Even though China is the world’s biggest coal producer, it is likely to become a net importer within the next couple of years, the government reckons. And India’s government reckons it will be consuming four times as much coal as it does currently by 2031.
So what’s the best way to buy into coal? You could look at Energybuild (EBG), but there’s no doubt that it’s a high-risk play, as with any mining minnow. A far less risky pure play on the fossil fuel is US-listed Peabody Energy (BTU). The company is the world’s largest private sector coal company. Its shares trade on a price-to-earnings-growth ratio of just over one, which means they’re not cheap, but are reasonable value, particularly if you agree that the coal price is likely to keep rising.
Another play is FTSE 100 mining giant Xstrata (XTA). The company is actually the world’s largest exporter of thermal coal (used in power generation), and the fifth-largest producer of hard coking coal (used for industry, such as steel production). It’s by no means a pure play – it has significant exposure to many other commodities as well, including copper, nickel and zinc. But there are other compelling reasons to buy Xstrata – the group has a huge development pipeline, it’s keeping a tight grip on costs, and despite strong growth in the share price over the past year, it’s still valued at a discount of around 20% to larger peers such as Rio Tinto. With commodity prices likely to remain solid across the board, Xstrata looks like a decent bet too.
Turning to the wider markets…
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In London, the FTSE 100 ended the day with triple-digit gains, adding 119 points to close at 6,308, as blue-chips rose across the board. Financial stocks – including Standard Chartered – performed well, as did REITS, most notably Liberty. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 added 87 points to close at 5,620 and the Frankfurt DAX-30 was up 69 points to end the day at 7,513.
Across the Atlantic, the volatility continued as the Dow Jones moved 100 points in either direction during trading as investors digested the Fed’s latest statement on economic growth. The industrials index eventually ended the day 35 points higher, at 13,504. The S&P 500 was up 8 points to 1,476. And the tech-rich Nasdaq added 14 points to close at 2,561.
In Asia, the Nikkei 225 had risen 107 points to 17,029 and the Hang Seng was up by as much as 510 points to 22,418.
Crude oil futures had fallen to $72.24 this morning, whilst Brent spot was at $71.65 in London.
Spot gold had fallen to $671.30 this morning, compared to $672.10 in New York late last night. And silver was little-changed at $13.06.
Turning to the foreign exchange markets, the pound was at 2.0202 against the dollar and 1.4702 against the euro. And the dollar was at 0.7275 against the euro and 119.15 against the Japanese yen.
And in London this morning, broadcaster ITV announced that first-half profit had fallen less than expected and predicted higher Q3 advertising sales. The company, which has seen revenue from phone-in quizes fall since concerns were raised in March that customers were being misled. Net income was down 31% to £84 million, compared to £121m over the same period last year. ITV shares had risen by as much as 1.8 pence in early trading.
And our two recommended articles for today…
Why did mortgage banks ever think subprime was a good idea?
– If house prices only ever went up and loans were spread out among many investors, then lending to subprime borrowers could be considered relatively foolproof. But, as the financial news has shown lately, it’s anything but. For more on why lenders granted mortgages to those who couldn’t afford them, see:
Why did mortgage banks ever think subprime was a good idea?
Who’ll benefit from the oil sands energy wars?
– There is a lot of talk about how the Canadian oil sands could save the US from its looming energy crisis, but the situation is far from straightforward. With demand from China paving the way for a three-way energy war, click here to find out how investors can get involved: Who’ll benefit from the oil sands energy wars?