The numbers are enough to make you do a double-take. The WisdomTree Coal Fund (TONS) is up a robust 41 percent thus far in 2016 and the Van Eck Vectors Coal ETF (KOL) is up a stunning 73 percent. An industry that was left for dead now seems to be getting a second wind.

The key questions for investors: What’s driving the renaissance, and can coal stocks and the funds that track them surge even higher?

Darwinian Evolution

The global coal industry has endured a survival-of-the-fittest shake out that has caused once-strong firms to go belly up. Peabody Energy, for example, was worth $20 billion five years ago, but sought bankruptcy protection this past May. That caps a string of more than 50 Chapter 11 filings in the industry over the past few years, led by firms such as Patriot Coal, Alpha Natural Resources and Walter Energy.

A steep drop in coal prices, along with a shift at power plants from coal to natural gas, are key reasons for the industry’s stress. But many of those domestic producers also suffered from the fact that Appalachian coal has become increasingly expensive to mine as the easy seams have already been tapped.

Yet in places such as Wyoming and Montana, mining costs are 75 percent lower at around $10 per ton. That’s why the U.S. Energy Information Administration (EIA) expects coal production in that region’s Powder River basin to rise 13.5% a year over the next five years.

A shake-out might be just what this industry needed. “The massive shutdown in coal production in the U.S. and elsewhere means that the industry is no longer plagued by overproduction,” says Steve Doyle, a long-time coal industry advisor who runs an industry blog called BTU Baron LLC.

In fact, domestic coal production has fallen more than 30 percent thus far in 2016, according to S&P Global Platts. And coal production in China actually peaked in 2012 and is set to fall further as the Chinese government pushes mining firms to shrink output by another 16 percent. Output in Indonesia and Australia, two other large coal producers, is also off by double-digits this year.

Demand Is Still There

The demand side of the equation is also less bad than feared. “Between carbon emission mandates and Chinese growth slowdown, coal demand was expected to get hit really hard. Instead, demand proved to be resilient and the deep production cuts in China helped the market rebound,” said Harish Sundaresh, senior commodities strategist at Loomis Sayles, in an email interview. 

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