Coal has staged a remarkable rally this year – in particular, China has been instrumental in supporting global coal prices.
That and other factors, including U.S. presidential politics, have helped the VanEck Vectors Coal ETF (NYSEArca: KOL), which tracks the coal industry, surge nearly 114% year-to-date.
However, KOL is up just 1.4% this month leaving some traders and analysts to wonder if coal equities are vulnerable to retrenchment even with Republican Donald Trump set to become the 45th U.S. president.
Contributing to the surge in coal prices this year, China has drastically curbed its domestic coal production since April. Beijing is limiting the number of days miners can work in an attempt to control a bloated sector. Meanwhile, heavy rainfall across China’s northern coalfields have disrupted local mines and railways.
The ongoing shale oil boom has pressured natural gas prices and made natgas a cheap alternative to coal. Additionally, new environmental regulations have forced coal-fired power plants to close, and many are being replaced with natural gas.
Moreover, China, the world’s largest consumer of coal, is beginning to diminish its reliance on coal in favor of alternative renewable energy sources as pollution becomes a major concern and clean energy becomes cheaper. According to Bloomberg analysts, about two-thirds of money spent on adding new electricity capacity worldwide will go to renewable between now and 2040.
“Coal bulls hope the Trump era will continue the black fuel’s recovery rally, with environmental rollbacks increasing production, but that’s not likely, due to the utility sector’s multi-year and multi-billion dollar transition into natural gas, solar power, and other less polluting alternatives. As a result, the sector rally could be nearing its end, with realism and a long-term trading range taking control in coming months,” according to Investopedia.
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Materials equities and funds like KOL have been benefiting from rebounding areas of the mining industry that were previously punished, including gold, coal and steel. Many industrial metals and miners rallied on the belief that China would support growth through stimulus measures, augmenting demand for metals while enticing investors to jump back in.
KOL “uilt a head and shoulders topping pattern into an August 2011 breakdown, yielding a downtrend that initially found support at the 2010 low in the upper 20s. A bounce into 2012 posted a lower high, with the subsequent decline breaking support a few months later. A channeled decline then took control, with steady losses continuing into the second half of 2014,” adds Investopedia.
VanEck Vectors Coal ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.