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U.S. and European debt concerns have triggered some dismal market performances - but there is still one energy sector that's moving up.
And that's coal.
The Dow Jones U.S. Coal Index, which tracks 69 energy and coal-related companies, has climbed 60% in the past year and 13% in the past month.
So what's the key motivating factor moving the world's best coal stocks higher?
Simply put, it's a combination of shrinking supplies and rising demand.
Indeed, Coal prices are up more than 20% in the past year and many experts say increasing consumption from emerging economies like China - the world's biggest coal consumer - and India will push prices even higher.
China's rapid growth has been the main driver behind an average 3.8% annual increase in global coal demand since 2000. In fact, the country accounted for about half of the world's coal consumption in 2009. And a China Energy Research Institute report recently estimated that country's economic growth, urbanization, and rising middle class would increase coal demand by 700 million tons to 1 billion tons by 2020.
India's coal imports are expected to double to 100 million tons by 2012. And Japan also will boost demand attempts to rebound from the tragic March 11 earthquake and tsunami.
Growing demand isn't the only reason to believe prices will soar, either. Because as worldwide demand surges, global coal supplies are rapidly falling.
China's growing demand could reduce its coal reserves' lifetime from 62 years to about 33 years by 2020. And if coal demand increases yearly along with Chinese economic growth, it could deplete reserves to just a 19-year supply in that time.
Meanwhile, other countries' estimated coal reserves are shrinking as geologists uncover more limitations on coal extraction - like quality of coal and depth of reserves. And harsh weather also has tightened supplies. Floods in Australia this year trimmed the country's coal output by 15%, and similar inclement conditions in big coal-producing nations like Indonesia and South Africa have cut estimated output.
The combination of increased demand and limited supply means coal prices will continue to soar. And this bullish outlook is giving a boost to coal-related companies like Peabody Energy Corp. (NYSE: BTU), the world's largest private-sector coal producer.
Peabody this week reported a 38% increase in second-quarter profit and raised its full-year earnings outlook to $4.20 to $4.60 a share from $3.50 to $4.50.
The coming price increase also has fueled a flurry of mergers and acquisitions in the sector. Peabody earlier this month partnered with steelmaker ArcelorMittal (NYSE: MT) to offer $5.1 billion for Australia's Macarthur Coal Ltd. Macarthur specializes in pulverized coal used by steel producers, and would make Peabody a go-to coal supplier for heavy industries.
Naturally, Peabody isn't the only company profiting from coal's price rise.
In fact, Money Morning Contributing Writer Dr. Kent Moors on Monday alerted readers to another red-hot coal investment that's still flying low under the radar. But to get information on that pick, and a more thorough analysis of the best coal stocks money can buy, you'll have to sign up for Dr. Moors' newsletter - the Energy Inner Circle.
News and Related Story Links:
- Money Morning:
Coal Use in China Shines Light on Growth
- The Associated Press:
Peabody's 2Q earnings rise, raises 2011 outlook
- Post Carbon Institute:
The End of Cheap Coal