Funds and etfs

Chinese Demand Fires Up Coal ETFs

Coal exchange-traded funds (ETFs) have been heating up over the past year, with the Market Vectors Coal ETF (NYSE ARCA: KOL) trading more than 56% higher. Behind these increases, the price of physical coal has increased from a low of $49 per ton in January to more than $59 per ton, according to Argus, which represents a 20% increase so far this year.

The bullish sentiment stems from the Chinese government’s move to reduce surplus capacity, which led to Chinese buyers hoarding supplies and propping up prices. Recently, the government ordered mines to cut capacity by 16% and operate for 276 days per year compared to 330 days per year. Chinese buyers began buying up coal in advance of the production cuts in anticipation of rising prices and a potential lack of supply.

In addition, higher crude oil prices have lifted natural gas prices – coal’s core competitor in the energy markets. Natural gas prices have rebounded strongly from their late-May lows to $2.73, while the rally could continue if crude oil continues its move higher. These moves could ease deflationary pressure on coal as a primary power generation source throughout Asia.

According to Citi analysts, the “least loved” part of the energy sector is looking in better shape than it has for several years. Morgan Stanley analysts suggested that so many domestic cuts have occurred in China that it may need to engage the seaborne market to meet demand.

If China strictly enforces the new regulations and the la Nina weather leads to increased rainfall that impacts output, Citi analysts believe that the commodity could rise as much as $90 per ton – a significant move given that current prices are hovering around $60 per ton.

Investors may want to keep an eye on coal ETFs over the coming quarters as these events play out.