Indeed, Chinese coal imports rose 30 percent in this year’s first half of 2016 versus a year ago. And across the rest of Asia, coal demand is on the rise. Macquarie predicts that energy consumption in that region will rise 31 percent over the next decade, and two-thirds of that increase will be met by fossil fuels such as coal.
The demand outlook in the United States may also be firmer than expected. While coal’s role in power plants has fallen from 48 percent to 33 percent in the past decade, the EIA thinks it will fall to only 30 percent by 2030.
The International Energy Agency predicts that coal’s share of primary energy consumption will fall from 28 percent in 2012 to 22% in 2040. Yet that should still translate into a modest 0.6 percent growth rate in coal consumption through 2040, thanks to the fact that global power needs continue to grow at a rapid pace. In effect, coal will garner a smaller slice of a much larger pie.
To get a sense of the outlook for the coal ETFs, it helps to look at the prospects of the underlying holdings. With a nine percent weighting, Teck Resources Limited is the largest member of the Van Eck Vectors Coal ETF. A slew of cost cuts and an improved revenue picture has pushed this stock up from a 52-week low below $3 up to $16.28 as of yesterday’s closing price. Paradigm Capital’s David Davidson sees shares rising to $23, which equates to book value.
This ETF, which was launched in early 2008 and carries a 0.59 percent expense ratio, has 70 percent of its assets outside of North America. Fully 44 percent of the firms—by weighting—come from China and Australia, which is a major coal supplier to China. Around 35 percent of the fund is invested in firms that sell mining equipment, and the remainder are either coal miners or energy producers.
The Wisdom Tree Coal Fund, which carries a 1.25 percent expense ratio, is not as popular a choice with investors with just $1.1 million in assets versus $76.4 million for the Van Eck ETF. It was launched in February 2015, and may just need more time to gain traction with investors.
This fund doesn’t track coal stocks, but instead focuses on coal futures contracts. The fact that global thermal coal benchmark prices are up 30 percent this year, while coking coal prices (which is used in steel-making) have risen 20 percent, has surely aided this ETF’s returns.
So the real question is: Will China’s appetite for coal last? It looks like the massive shakeout in the coal industry has come to an end as the weakest firms in the highest-cost mining regions are already in bankruptcy. With pricing and demand now stabilizing, the surviving coal stocks—and the ETFs that track them—should benefit in coming years from a more stable backdrop.
Like with Big Tobacco, coal stocks and funds may have become social pariahs, but they will continue attracting some investors with their appealing cash flow valuations.