Last updated on 14 de March de 2023
Coal is one of the most unpopular energy sources. The green agenda wants to ban its usage. But coal continues to be necessary for humanity. We discuss the reasons for and ways of investing in coal.
- Coal Consumption in the 21st Century
- Advantages of Using Coal
- Risks of Investing in Coal
- How to Invest in Coal
Coal powered the industrial revolution and is seen be many as obsolete. Nevertheless, its consumption never stopped growing and demand is at an all time high. Therefore, it is one of the most controversial energy sources.
This is because coal is very dirty from an environmental perspective. This makes it incompatible with the aggressive green agenda that most developed economies are implementing.
However, coal consumption will not disappear from one day to the next. Nor does it mean that investing in coal no longer makes sense. Most countries, including many in the developed world, are still dependent on coal to fulfill its energy needs.
Our standard of living requires a significant amount of affordable and reliable energy. And coal is part of the energy mix. While its importance has decreased in recent decades, it is by no means obsolete.
Because coal is a good alternative to natural gas, whenever natural gas prices spike or its supply is at risk, demand for coal in the developed countries increases.
When it comes to developing nations, due to affordability, coal still remains one of the preferred energy sources.
As a result, while we can all agree that the world may be consuming less coal in 50 years than today, it is also true that investing in coal can present very attractive opportunities.
Coal Consumption in the 21st Century
Coal has multiple applications. According to the USGS, two-thirds of the coal consumed go to electricity production, some of that in developed nations. In fact, a significant percentage of the electricity consumed by electric cars comes from burning coal.
Apart from that, coal is also used for heating cities and powering industry. The most important industrial sectors leveraging coal are steel and cement. And, obviously, charcoal can also be used for barbecues at home.
According to BP, China and India are the world’s largest coal consumers. Both countries continue to increase their coal consumption every year in order to keep pace with their growing economies and energy requirements.
China consumes more than 50% of all coal mined. For its part, India consumes over 10% of global production. Next countries on the list of largest consumers are the United States, Germany, Russia, and Japan. As you can see, coal consumption is not exclusive to emerging countries.
And, despite the many initiatives to reduce green has gas emissions, the process is likely to take a very long time.
For example, if we look at China, its government has expressed its intention to start reducing coal consumption from 2026 with the aim of achieving zero net emissions by 2060. This means the most optimistic projections for China do not consider giving up coal until at least four decades from now.
At the same time, coal exports are very important to some countries. According to the International Energy Agency, the largest coal exporters are, in order of importance, Indonesia, Australia, Russia, the United States, South Africa and Colombia.
Advantages of Using Coal
There are obvious advantages for continuing to use coal in our energy mix:
One of coal’s positive features is its low cost. This is something appreciated by both developed and emerging countries.
The low cost of coal makes it difficult for many developed countries to replace it in their energy mix without dramatically increasing the cost of electricity. Additionally, these countries already have processes in place to reduce the negative effects of burning coal on the environment.
Regarding emerging countries, many of them simply depend on coal. It is unreasonable to think that they will stop using it anytime soon. In fact, it would be highly unfair for rich countries to try to force poor countries to quit using coal in the short term.
The world has coal reserves for many years. It is estimated that known reserves alone could meet current global demand for approximately 130-140 years. These data improve in some self-sufficient countries, which could keep up their current level of coal consumption for more than 500 years.
The countries with the largest known coal reserves are the United States, Russia, Australia, China, India, Indonesia, and Germany. New coal deposits can be found if exploration activities are financed.
Coal is a Base Energy
Base energy are energy sources that can be used at any time and under any circumstances. That contrasts with most renewable energies, such as solar and wind, which depend on the weather and the time of day.
Coal is a base energy, like oil, natural gas and nuclear. No matter how many alternative energy sources we develop, our society is always going to need base energy, unless we want to have to deal with constant blackouts.
Emissions Reduction Technology
Although coal can be very negative for both the environment and people’s health, technology exists that allows to reduce these effects in a very significant manner. In most countries, the use of such technology is mandatory.
Risks of Investing in Coal
When it comes to the risks of investing in coal, these are the most important one:
The biggest threat to the coal sector, especially in developed countries, is regulatory changes. The energy transition that we are in the midst of has, as one of its objective, to completely ban the use of coal.
Changes in regulation are likely to hit both the use of coal and its production. As a result, it is very likely that, at some point, Western governments will completely ban the mining and export of coal. This would force the closure of many businesses.
Advances in Renewable Energy
Although society will always need to have base energy, no matter how much progress there is renewable energy technology, they still pose a threat on the margin. And huge amounts of resources are being poured into developing renewable energy infrastructure.
After all, as these alternative energy sources improve and become cheaper, they can take up a larger share of overall energy consumption. And when it comes to base power, society may prefer uranium or natural gas over coal.
We have touched on this several times already, but we need to mention it again. Coal is one of the most polluting and destructive energy sources, both for the environment and human beings.
In fact, both mining and burning coal carry negative consequences. This is one of the reasons why regulation aims to curtail both its use as well as its production.
How to Invest in Coal
There are two options available to most investors if they want to invest in coal:
Coal Production Companies
As usual in the natural resources sector, one of the easiest ways to make a bet on a specific commodity is to buy shares of companies that operate in that sector.
Some of the most important corporations in the coal mining sector are Peabody Energy Corp. ($BTU), Consol Energy ($CEIX) and Ramaco Resources ($METC).
Unfortunately, there are no coal mining ETFs available. The last one, the VanEck Vectors Coal ETF, closed down in late 2020.
The other way to invest in coal is through a futures contract. Keep in mind that futures are complex derivative instruments that allow us to commit to buying or selling a certain amount of coal in the future, and we only have to put a small percentage in. Therefore, I would suggest that you do enough due diligence before taking action.
By trading coal futures, we can profit if the price of the underlying commodity moves in our favor. This means that, if we believe that the price of coal will increase or decrease in the future, we can either buy or sell coal futures contracts.
Coal futures are traded on the Chicago Mercantile Exchange.
Investing in coal is not for everyone. Coal has already seen its best days and is likely to experience a secular demise in the future. Therefore, it can be considered a contrarian investment.
However, we must not forget that many countries are still dependent on coal. That includes China, whose economy is set to become the largest in the world before 2030. And enough demand for coal guarantees that coal mining operations will continue in many regions.
At the same time, because investors are so pessimistic about the prospects for coal, the valuation of coal companies is very low. Consequently, very little has to happen to beat expectations.
I hope you found this analysis about investing in coal useful. If that is the case, I encourage you to subscribe to my newsletter:
And if you want to read about another commodity that will be key to build out green energy infrastructure, check out this link:
Investing in Lithium  – EV Commodity Trade