The future promise of green and renewable energy is certainly great. Finding these cleaner and carbon neutral sources of fuel could be one of the better longer term investment themes. In the short to medium term, fossil fuels will continue to show their dominance. While natural gas is finding new prominence in various nations' energy plans, the worldwide demand for coal is going strong. In addition, recent developments across the sector have created some opportunities for investors to add exposure to this fuel source.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Coal's Still Growing
Despite advances in renewable energy technologies, coal is still the major fuel for worldwide electricity generation. Nearly 40% of the planet's electricity is produced using coal and it is the dominant fuel source in India, the United States, Australia and Europe. Coal accounted for more than 71% of China's energy in 2008. Analysts estimate that China's coal demand will reach 1.92 billion tons in 2011, up approximately 10% versus 2010's demand. Overall, the Department of Energy estimates that international trade in coal will grow to account for 47% of the fuel market by 2035 and still represent a dominant 28% of market share.

Back in 2011 the Japanese tsunami and questions about the role of nuclear energy gave coal a boost. The disaster took out nearly 9.7 GW worth of nuclear power capacity as well as 9 GW of thermal capacity. As a result, coal is being seen as a readily available power source and many coal-based power producers are over-extended. Thermal coal prices have been steadily rising throughout producing regions as weather and other issues have negatively impacted supply. By the end of March, coal prices were nearly 33% higher than a year ago.

Coking or metallurgical coal is also seeing a boost in prices and demand as the emerging world continues its infrastructure binge. Coal is used to produce 70% of the world's steel and is essential to the production of cement. The U.S. Energy Information Administration (EIA) estimates that Australia's total exports of metallurgical coal to Asia, including Japan and India, will increase 64% by 2035. Rebuilding efforts in Japan will also continue to put pressures on coal supplies and prices. Prices for coking coal have risen 47% to a record $330 a metric ton.

Finally, coal could see a long-term boost as a result of various "green" initiatives. The U.S. and China have committed to so-called "clean coal" technologies such as carbon capture strategies and new scrubber filters. These plans could make coal competitive with other "green" energy sources and boost overall demand.

SEE: Clean Or Green Technology Investing

A Coal-Fired Portfolio
Arch Coal's (NYSE:ACI) $3.4 billion bid last year for International Coal (NYSE:ICO) highlights the supply/demand imbalance and need for coal. Investors looking to add the sector can do so with the Market Vectors Coal ETF (NYSE:KOL). The fund follows 38 different firms associated with the fuel source including many of the "pick and shovel" plays such as Joy Global, (Nasdaq:JOYG). Alternatively, the PowerShares Global Coal (Nasdaq:PKOL) is another broad play on the theme. Funds such as the SPDR S&P Metals & Mining (NYSE:XME) also make adding the sector easy.

The more interesting coal plays could be some of the smaller miners. Both James River Coal (Nasdaq:JRCC) and Patriot Coal (NYSE:PCX) have a mix of valuations and assets that could make them takeover targets as the industry consolidates. Even if a takeover never materializes, the pair will benefit from strong global coal demand.

Norfolk Southern (NYSE:NSC) railroad derives about 30% of its revenue from coal, and will therefore also be a beneficiary of global coal demand. As coal miners continue to produce more coal for export, Norfolk will be the one transporting them across the country to various ports for shipping overseas. Shares of Norfolk yield 2.8%.

Finally, for investors looking for more income from their coal plays, both MLPs Penn Virginia Resource (NYSE:PVR) and Alliance Resource (Nasdaq:ARLP) yield more than 5%.

The Bottom Line
As energy demand increases and new infrastructure projects continue to be created, demand for coal is set to rise. Investors with long enough time lines should allocate some capital not only to renewable energy and natural gas, but to coal as well.

SEE: Forget Green Stocks, "Green" Will Do

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  4. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  5. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  9. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!