How to profit from the coal glut

Demand for coal is tumbling as producers exploit new reserves of natural gas. That's bad news for coal miners, but opens plenty of opportunities for investors. John Stepek explains how you can profit.

The US natural gas revolution' is quietly transforming the energy sector.

You're probably familiar with the story by now. In short, new fracking' technology has seen the US gain access to vast reserves of natural gas stored in shale'.

So far, the focus of the excitement has been the potential long-term impact on America's demand for foreign oil.

But natural gas is already having a far more significant impact on a less widely-watched commodity.

Old King Coal may be losing his throne

Coal demand is tumbling

You may not have noticed it's not the most widely reported economic number but the price of coal is at a 15-month low.

This is no doubt partly to do with jitters over Chinese demand for raw materials. But there's a more immediate cause too. There's just too much of the stuff. And that's down to the US natural gas glut.

As fracking' has unleashed new reserves of natural gas, the price of gas in the US has collapsed. Prices have fallen by more than 80% over the past seven years or so.

Falling prices normally act on a market in two ways. On the supply side, supply is normally reduced. However, in the case of natural gas, a lot of the producers have been forced to keep pumping product even at a loss in order to generate cash flow to pay for their projects.

On the demand side, though, people have started to notice. Utility suppliers are increasingly switching to natural gas-fired power stations at the expense of their coal-fired ones.

New regulations in the US are also driving the change. As Bloomberg reports: "Utilities are also switching because of an impending government rule that calls for Texas and 26 eastern states to cap sulphur dioxide to limit acid rain and soot".

Coal remains the largest source of electricity production in the US. But in December its share of the market fell below 40% for the first time since March 1978, reports the Financial Times. At its 1985 peak, coal accounted for nearly 60% of generation.

This declining trend looks likely to continue. And while that could be bad news for coal miners, as Eoin Treacey of Fullermoney.com noted last month, "if power companies are going to be forced to use less coal, then natural gas is likely to be a beneficiary".

What to buy now

So what does all this mean for your portfolio? It's certainly worth keeping an eye on natural gas producers. They've been hit hard by the production glut'. But as a result of low prices, many producers have slashed production. Meanwhile, as demand for cheap natural gas rises, it won't stay as cheap.

I wouldn't use an exchange-traded fund to play natural gas directly. For a start, that relies on your ability to call a bottom in the gas price, which is pure speculation. Secondly, commodity ETFs are complicated beasts. If it's not physically backed (like many of the precious metal ETFs) then chances are it won't do what you expect it to. So steer clear.

Instead, I'd invest in stocks exposed to natural gas. One intriguing play is Consol Energy (NYSE: CNX). US financial paper Barron's had a favourable review of this stock a couple of weeks ago.

Consol is a major thermal coal miner. However, it also produces natural gas. And at current prices, reckons Barron's, "investors are getting one of Consol's businesses free". Given that both coal and natural gas are cheap relative to oil right now, the company looks a good way to hedge your bets.

Another increasingly interesting area is shipping. Tanker stocks have had a torrid time since the financial crisis. Booming global trade came to a halt almost overnight, leaving behind a glut of unwanted ships. The sector has yet to recover.

But if the US is going to turn into an exporter of both coal and natural gas, that's going to affect demand for shipping. For example, notes the FT, "low freight rates are helping US thermal coal producers ship their commodity into the European and Asian market".

Again similarly to the natural gas market, in fact as demand rises for tankers, freight rates will pick up. My colleague David Stevenson has been looking at the tanker sector and recently wrote about what he thinks is the most promising play for the Fleet Street Letter. To find out more about the newsletter, watch this video.

The Fleet Street Letter is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer Services: 0207 633 3600.Shares are by their nature are speculative and can be volatile. Your capital is at risk so you should never invest more than you can safely afford to lose. Information in Money Morning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Our recommended articles for today

Corporate bonds look costly: but these two risky plays might pay off

Corporate bonds have been very popular investments of late - but they are now looking expensive. Phil Oakley asks whether there is any value left in them, and picks two potentially lucrative but risky bonds to buy now.

Japan: ready for take-off or another false start?

A key Japanese stock index recently saw over six weeks of continuous gains. The last time that happened, says Merryn Somerset Webb, one of history's greatest bull markets followed. Are we finally going to see Japan taking off?

Recommended

The charts that matter: bond yields turn back up and a new bitcoin record
Global Economy

The charts that matter: bond yields turn back up and a new bitcoin record

Bitcoin hit a new all-time high, while government bond yields turned back up. Here’s how that has affected the charts that matter most to the global e…
23 Oct 2021
Coal makes a comeback
Coal

Coal makes a comeback

The environmental case against coal may be clear, but that hasn't stopped the price rising more than fourfold in the last year.
22 Oct 2021
The after effects of the gas-price shock
Economy

The after effects of the gas-price shock

In the wake of the recent spike in the natural gas price, we can expect slower growth, an industrial recession – and a newly assertive Russia, says Ma…
17 Oct 2021
The charts that matter: bond yields slip while bitcoin tops $60,000
Economy

The charts that matter: bond yields slip while bitcoin tops $60,000

Cryptocurrency bitcoin soared to over $60,000 this week, while government bond yields fell back. Here’s how that has affected the charts that matter m…
16 Oct 2021

Most Popular

How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021