How to Cash In On Coal
With the market bouncing all over the place - down 2 percent one day then up 3 percent the next, you're probably wondering where the best place to put your money is. In yesterday's issue of Small Cap Investor Daily- Alternative Energy Stocks Picking Up Steam, I recommended the alternative energy sector. Stocks in this sector continue to gain momentum as oil prices increase.
First off, I think energy is a good place to be, but you should not limit yourself to only alternative energies. The old standbys, including coal, are proven, abundant, and cheap. They will continue to be used - don't forget that for one minute.
A man once said "The 19th century belonged to England, the 20th century belonged to the US and the 21st century belongs to China. Invest accordingly". That man was Warren Buffett, one of the most well-known, well respected, and most successful investors in the world.
China's economy has been growing extremely fast over the past 10 years, and while the country faces several risks right now, energy consumption is unlikely to trail off in a significant way. During the middle of the global financial crisis, China's GDP growth slowed to 6.2 percent. It has since returned to previous levels over 10 percent GDP growth.
I wish US GDP could hit 6 percent. You have to go back to the 1980s to see the US with that rate of growth.
***According to the International Energy Agency, last year China passed the United States and became the world's largest energy consumer. The IEA says China consumed about 2.252 billion tons of oil equivalent (btoe) in 2009, while the US consumed 2.170 billion tons, about 4 percent fewer.
This "changing of the guard" was not the least bit surprising to those of us who have been monitoring China's growth. The chart below shows China's increasing energy consumption over the last 10 years relative to that of the United States.
As China continues to export more and more goods, producers are using more inputs. Naturally, energy is one of the largest of these. Contributing to the growth of energy consumption is the fact that China's middle class, which according to the Euromonitor International will reach 700 million by 2020, is using more energy as they purchase cars, homes, and other consumer products.
Fatih Birol, chief economist at IEA, said this change in global energy consumption marks "...a new age in the history of energy". Avoid the transition at your own profit-peril. You should have some exposure to the trend, and coal mining companies are one of the best ideas.
***Let's look at the most common types of energy China uses. The chart below shows China's energy mix in 2006. These numbers are from the US Energy Information Administration's 2006 annual report, and the relative proportions have stayed more or less the same.
As of March 2010, the National Energy Administration states that coal is China's major energy source, still accounting for around 70 percent of total energy consumption.
*** Coal is in many ways the antithesis of clean energy, but don't let that fact alone deter you from investing in it.
It is plentiful and cheap; the only way alternatives stand a chance of becoming a greater part of the energy mix is if traditional sources remain both cheap and plentiful. Consider coal to be a 'subsidy' to alternatives - phasing alternatives into the energy mix while continuing to use coal keeps the entire energy supply within bounds of what is economically feasible.
The United States only developed so quickly and got to where it is today by using coal and other energy sources that were easily accessible. China represents the developing country we used to be.
***On Tuesday the National Energy Administration reported that China's coal imports reached nearly 81 million tons in the first half of 2010, an increase of 71 percent from a year earlier. This increase in imports shows that coal companies in China are struggling to meet growing domestic demand.
Out of all the stocks that are exposed to China and are in the energy sector, I do have a favorite. It is a coal mining company based in the U.S. but with all operations on mainland China. This stock is expected to grow revenues by over 100 percent in 2011. Over the last year, the stock is up 248 percent, and still has a lot of upside potential.
You can get my full research report on this stock when you sign up here.
The fact remains that coal is the top energy source driving the global economy. Adding a coal stock to your portfolio, in addition to strong alternative energy stocks, is the best way to gain exposure to growing energy consumption. Doing so means you're invested in both what is proven to work (coal), and what we would like to work (alternatives)- that's an approach that would make even Warren Buffet proud.
Have a great weekend.
