What’s Black, Dusty and Set to Rebound?

Dear Resource Hunter,

Here we are just days from the start of the fourth quarter and the overall markets are still flashing red. The S&P is down 5% on the year and the Dow down 8%.

But while this year has seen a lot of volatility for retail stocks, not one sector has felt the pain like coal.

This week was a good example…

At one point on Tuesday, the DOW had sunk 250 points. Oil prices were down 2%. Gold lost 0.72%.

However, two coal titans — Arch Coal and Peabody — had loses greater than 10%.

It’s no surprise coal has been a wild ride recently, either…

President Obama’s clean power plan was a sucker-punch to coal’s gut. Stocks fell over 90% on the premise that the natural resource was going to be completely phased out.

That’s when big time activist investor, George Soros, announced he had a 2 million dollar stake in the industry. Since then, prices have gone haywire.

Up 40% one day, down 30% another… Now that’s what I call volatility!

Investors are flip flopping on the future of the coal industry. But it begs the question: why did Soros invest and what is in store for later?

Well, whether or not you support the use of coal, firms will continue to use the resource for years to come. In fact, demand in developing countries hasn’t slowed — which is why coal is of particular interest.

For the full story, we’ll check in with Frank Holmes who examines the international trend of the coal industry. Read below for more…

New Study: We’re Nowhere Near Peak Coal Use in China and India

Resource investors, take note: By 2025, just 10 years from now, energy consumption in Asia will increase a whopping 31 percent. A whole two-thirds of that demand, driven largely by China and India, will be for fossil fuels, most notably coal.

That’s according to a new research piece by financial services group Macquarie, which writes that the estimated rise in fossil fuel demand is equivalent of “three times Saudi Arabia’s current (all-time-high) oil production.”

Change in Primary Energy Consumption Between 2014-2025

Macquarie’s research is in line with BP’s “Energy Outlook 2035,” released earlier this year, which predicts that more than half of the world’s energy consumption will come from China and India by the year 2035.Dirt Road

Many readers might approach this news with a healthy dose of skepticism. Haven’t we been told that fossil fuels are falling out of favor? Aren’t governments placing caps on coal use to appease environmentalists and climate change crusaders?

It’s true that coal demand in China has declined a huge 6 percent so far in 2015, the result of anti-air pollution laws that temporarily restricted not just coal use but also factory operations and the amount of driving you can do.

Last month I shared a striking photo of a man cycling through Beijing, a brilliant blue sky overhead—something I’ve personally never seen in my 25 years of visiting the city. As most people know, Beijing is notorious for its noxious yellow haze, and the government has been pressured lately to act. In Shanghai, authorities plan to close and relocate 150 factories in preparation for the proposed Shanghai Disneyland, the thinking being that the “Happiest Place on Earth” must have clear blue skies.

I think we all agree that clean air is preferable to smog, but there needs to be a balanced approach to environmental policy that’s also business-friendly.

“Coal producers within China are definitely facing a consistent push by the government for clean energy,” says Xian Liang, portfolio manager of our China Region Fund (USCOX).

To get a better sense of the biblical quantity of raw materials China currently consumes, check out this infographic courtesy of Visual Capitalist.

Can India Pick Up China’s Slack?

Today, China and India collectively consume about 60 percent of all coal produced in the world. In absolute terms, consumption is expected to continue expanding as their populations balloon and the energy-thirsty middle class expands. In other words, as the energy pie gets much bigger, each slice should likewise grow.

By 2025, Macquarie writes, coal will still play a dominant role in China’s energy mix.

Coal to Remain the Dominant Energy Source in China by 2025

It’s possible that if China’s coal consumption dramatically declines, India will be there to fill the hole. Macquarie estimates that by 2025, India’s energy demand will rise 71 percent, with coal taking the lead among oil, gas, hydro, nuclear and others. The south Asian country is already the second-largest importer of thermal coal, and it might very well surpass China in the coming years. Macquarie writes:

Although all energy use will rise [in India], coal is the major theme as consumption and local production are both set to almost double by 2025 on the back of large-scale coal power plant construction plans.

The group adds that, unlike China, India has no present interest in reigning in its use of coal. Most emerging markets, India included, recognize that coal is an extremely affordable and reliable source of energy, necessary to drive economic growth.

Even if these predictions don’t come to fruition, the consensus is that we haven’t yet seen peak coal use in Asia. Estimates vary depending on the agency, but everyone seems to agree that demand in the medium-term will rise before it retreats. A 2014 MIT study even suggests that Chinese coal consumption could rise more than 70 percent between 2012 and 2040.

Consenus: We Haven't Seen Peak Coal Use in China

Follow The Smart Money

With prices at multi-year lows and coal producers under pressure, some big name investors have used this as an opportunity to accumulate shares in depressed stocks. Recently I shared with you that influential billionaire investor George Soros just took a $2-million position in coal producers Peabody Energy and Arch Coal.

Maybe he’s on to something, if Macquarie’s research turns out to be accurate.

No one can deny that fossil fuels, and coal in particular, face many headwinds right now, including government policies intended to limit their use. The strong U.S. dollar has created havoc for commodities such as oil and coal, just as it has for American companies with business activities in foreign countries. And with many central banks around the globe continuing to devalue their currencies against the dollar, a strong greenback might be the “new normal” for a while.

Also like oil, coal is facing oversupply issues, as producers had not anticipated a slowdown in emerging markets.

But there and elsewhere, coal will continue to play a vital role in providing affordable, reliable energy for decades to come.


Frank Holmes
CEO and Chief Investment Officer, U.S. Global Investors

[U.S. Global Investors, Inc. is a boutique investment advisor specializing in emerging markets and natural resources. Their portfolio managers travel the earth researching opportunities and evaluating risk, all in the pursuit of exceptional performance for their funds. The company, headquartered in San Antonio, Texas, manages several no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.]

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