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Find the Lie in the Market and Exploit It

Posted October 8, 2019

When I was in middle school, one of my Saturday chores was to sweep the coal dust off the front porch. We lived at 1016 Westover Avenue, in the West Ghent neighborhood of Norfolk, Virginia. My father was in the Navy, and at that point in his career he was marking his time with the Second Fleet Admiralty.

I fell asleep every night to the sound of coal trains rumbling, banging, blowing horns, and shaking out dust as they moved coal from the West Virginia mines to the Chesapeake ports. Even though the railroad tracks were a mile away, past the country club pool with the 10-meter board, I still had to get my red-handled broom out every week and sweep that damn porch.

I imagine someone is sweeping that porch to this day despite the fact that Norfolk Southern saw its coal volume decrease by 4.4% in the second quarter from last year. Shipments of coal were the lowest they’ve been in eight years. Volume to utilities was down. Industrial was flat, and domestic metallurgical coal — used for steel production — declined precipitously.

The United States is using less steel. U.S. Steel’s (NYSE: X) share price has fallen by two-thirds over the past year, primarily due to a slowdown in auto production.

That said, Norfolk Southern’s coal transported for exports was up to 6.39 million short tons from 6.27 million the previous quarter. The export market was the only one to see an increase.

Coal Demand

While most of Wall Street has carved tombstones for the coal industry, global coal use is actually going up, and supply is going down. Coal mines are closing all over the place. Just since May, Revelation Energy, Cloud Peak Energy, and Cambrian Coal filed for bankruptcy. Westmoreland Coal went under last year.

The EU closed all non-profitable coal mines on January 1, 2019, which shut down 26 in Spain alone. But that doesn’t mean the EU has stopped using coal. In Germany they shuttered their nuke plants and their coal mines, and yet they use the same amount of coal they did in 2000.  

So not only did they make the environment worse, but electricity in Germany costs $0.33 a kilowatt-hour! To put this in perspective, I just signed a two-year deal that locks me in at $0.0643 a kWh. No wonder BMWs cost so much. What a mess. Talk about unintended consequences!  

Coal Exports

While the high horse Western countries are doing their topless green protest dance, emerging market countries like India and Indonesia just want to turn their lights on and watch the rugby world cup in their own homes.

This might be difficult in India, as one of its top three coal mines, Dipka, which normally produces 35mt of coal annually, got hit by a flood.  

The Hindustan Times reports:

A dramatic flood in which the nearby Lilagar river changed course led to large areas of the mine being submerged, with heavy machinery damaged.

The mine's production is now less than half its normal level, and much of it remains underwater, according to operator Coal India. Local media reported fears of fuel shortages at Indian power plants, and a possible increase in demand for imported thermal coal.

"An ongoing supply shortage from Coal India, and the fact coal generates nearly 75% of India's electricity means that coal imports are likely to increase," said John Meyer, research analyst at SP Angel. "This comes at time when coal imports by Indian power plans are growing at the fastest rate in five years."

India is expected to import 73 million metric tons of coal in the current fiscal year ending March 2020. Deutsche Bank thinks coking coal prices will go up in the fourth quarter.

Meanwhile, in China...

The Middle Kingdom is increasing investment in fossil fuel-powered projects in southeast Asia.

Engineering & Technology, citing a newer study by several environmental watchdogs, claimed China could add 290 GW of new coal-fired capacity this year — that is more than 10% higher than the entire existing U.S. coal-fired generation fleet of about 261 GW.

Bangladesh is also banking on more coal-fired power. A United Nations report stated that Bangladesh is planning to triple its coal-fired generation capacity to more than 18,000 MW and 35% of its electricity mix by 2041.

Asia is using more coal than ever before. In Europe and the U.S., coal use is declining. Asia produces poor-quality brown coal that has a lot of moisture and is a heavy pollutant. The United States has the most abundant high-quality coal in the world.

Asia wants cheap electricity but lower pollution.  

The invisible hand of the market has started to solve the problem by shipping U.S. coal to Asia.

Coal Export Growth Chart

At the same time, Wall Street has decided that coal is dead, which is why one coal exporter is now paying a 14% dividend. You could make a fortune, and you don't have to tell anyone how you did it. Find out more here.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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