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Is the Coal ETF Ready for a Rebound?

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The black diamond finally seems to be shining. After stern environmental legislation aimed at reducing carbon pollution in America, resurgence of alternative energy sources, supply glut and listless demand from key markets, coal or ‘black diamond’ got a thrashing in the recent past (read: Inside the Incredible Surge in Solar ETFs).  

This darkness was further validated by the Industrial Info Resources’ data which revealed 39% less active coal mining projects in the U.S. in 2013 than 2011 levels. However, some of the gloom was lifted when CONSOL Energy Inc. (CNX - Free Report) came out with upbeat coal guidance on Apr 7. The diversified fuel producer raised its annual coal production guidance range from 30.1–32.1 million tons to 31–33 million tons.

Per the energy company, demand for thermal coal appears solid ahead though metallurgical coal demand, particularly in Asia, would still be fragile. However, higher thermal coal demand seems to outweigh the lower metallurgical coal demand which spurred Consol energy to raise the production guidance.

The company’s coal mines produced 8.1 million tons in the first quarter of 2014 and the sales almost neared production. Also, the start of longwall production in the company’s new BMX Mine at the scheduled time indicates that the extremely dark clouds on coal industry might have started to disappear (read: Is This the Year for the Coal ETF?).

Market Impact

As expected, the production guidance came like a breath of fresh air for the entire coal industry. Not only Consol Energy, many other coal producing companies got the much-needed boost soon after the release of this news.

On April 8, Consol Energy itself gained 3.17% in the key trading session, Peabody (BTU) was up 2.25%, Alpha Natural Resources (ANR) received as much as 7.25% of price appreciation and Arch Coal (ACI) added 3.19%.
Not only Consol, BHP Billiton (BHP) too made some sort of dovish comments on coal demand this month. It expects global demand for coal to be strong till 2030 thanks to its affordability and enhanced demand from China and India, but coal prices may remain suppressed due to over production.

As per Exxon Mobil (XOM), coal will retain the second spot among energy sources in the near future. But gas will take over coal by 2025 and become the second-most used energy source globally, with both still lagging crude oil.

However, all is not yet well for coal companies. Renowned brokerage firm UBS downgraded its rating (on Wednesday) to Sell on some coal stocks like ANR, ACI and Walter Energy Inc. (WLT).

Still, Consol energy was not slapped with a rating cut. Rather, another brokerage firm, Macquarie, raised its rating on Consol to Outperform from Neutral. As a result, both ANR and ACI pared gains drastically while Consol was up another 1.44% as of April 9.

Clearly, coal investing is presently in a dicey situation with the expected revival of coal demand being a heavyweight factor. While playing this upbeat demand outlook is certainly possible through individual stock picks, this approach could produce high levels of volatility and miss out on some of the big winners.

Instead, investors may be better served by taking an ETF route for a wide exposure to the space. Below, we have highlighted the only coal ETF – Market Vectors Coal ETF (KOL) – in detail.

KOL in Focus

Launched in January 2008, KOL tracks the Stowe Coal Index, providing exposure to the companies related to the coal industry. Even though this index has a global focus, nearly 38% of its investments are directed toward U.S. companies, followed by China with a 23.5% share (read: Coal ETF in Focus on Sluggish Earnings).

KOL amassed an asset base of $153.9 million and charges 59 basis points in fees annually. This fund holds 35 stocks and the top 10 companies hold about three-fifth share of total net assets. Top three holdings, China Shenhua, Qr National and Joy Global make up for about 23% of the fund.

In-focus Consol Energy takes up the fourth spot with 6.33% share. Investors should note that Joy Global also has a chance of gaining from the likely revival of global steel and coal demand (see more in the Zacks ETF Center).

Following Consol Energy’s news, KOL gained 1.88%. The fund has gained about 3.0% this year in contrast to 2.40% gain noticed in the broader market fund SPDR S&P 500 ETF (SPY).

The fund is currently trading somewhat higher than its 52-week low which leaves room for rally as long as broad trends hold up well. Its 9-day moving average is higher than its 50-day and 200-day moving averages thus indicating a bullish trend in the future. Its current price is presently trading slightly higher than its parabolic SAR.

Bottom Line

While long-term price trend for coal is surely not bullish, investors having strong stomach for risk tolerance can try out some short-term zeal in the product. Investors should note that KOL currently has Zacks ETF Rank of 4 or Sell rating with a high risk outlook, so while the longer term isn’t looking great, there may be some catalysts in the short term for a further move higher in the mean time.

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