After the halting and starting three week rally we have seen in stocks, I would be negligent to recommend equity plays here. But there is one sector you should add to your “buy on meltdowns” list and that is King Coal.
Demand from emerging markets, especially metallurgical coal needed to make steel, is absolutely exploding. Industry experts say a major super cycle of buying from China, South Korea, Japan, and Taiwan that is creating a long-term structural shortage for the black stuff. One of the reasons Warren Buffet’s Berkshire Hathaway acquired the Burlington Northern Railway (BNR), was that it obtains 75% of its earnings from transporting coal to west coast ports for shipment to Asia.
The US currently derives 50% of its power generation from burning coal, and that dependence isn’t changing any time soon. The only potential drag is the subterranean price of natural gas, to which many coal burning utilities may switch, if prices fall further. Not only do power companies have the environmental incentive to switch to relatively clean burning CH4, it is also cheaper on a dollar per BTU basis. However, this only affects the domestic demand for coal, not the foreign markets.
If the Republicans win the November elections, a regulatory back off will deliver a sudden boost to profitability, and you can count on perceptions to front run that. The new cost of recent regulations brought in by the Obama administration has already been priced in to these stocks. Some of the premier names to look at here include Peabody Energy (BTU), Massey Energy (MEE), and Joy Global (JOYG).
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