Getting Coal For Christmas
Getting Coal For Christmas
The New (Climate) Sin Stocks
Investors have done awesomely if they dared to go against moralizing crowds and invested in “sin stocks”.
Weapons, gambling, and more than any other, tobacco.
But with changing zeitgeist come changing sins. Missiles sent to Ukraine or Israel are actually virtuous and ESG-compatible, you see. And smoking might actually get out of fashion.
However, nothing triggers more hysteria and emotional reactions than climate change (it’s not anymore warming, but “changing”). Including idiots gluing themselves to a road or damaging priceless historical art.
This comes together with the push for what I called “The Green Leap Backward”, the modern deadly hysteria rivaled only by Maoist’s China “Great Leap Forward”.
Of course, one target of climate activists is oil & gas, the visible evil that power cars and gas stoves all around us. But there is an even greater evil.
A polluting, dirty, highest possible carbon emitter.
The worst of all climatic evil, COAL.
The Case For Coal
I could make an elaborate argument for coal, but frankly, another substacker, Ferg, whom I warmly recommend on anything commodities-related, already did it:
In brief, the argument is such:
Asian countries, including India and East Asia, do not care about climate, but about cheap, safe, reliable energy.
Most of these people don’t even have air conditioning YET but are eager to increase their energy consumption.
This causes exploding demand AT NIGHT, right when renewables cannot deliver.
Their coal power plants are young, with another 30-50 years of usage ahead.
These countries have quickly growing young populations and strong economic dynamism, boosting total energy demand AND demand per capita.
Closing coal power plants in the West is entirely irrelevant when China alone is building a new one EVERY WEEK!
Lastly, as we are looking at a likely decade of 1970s style of stagflation, what did work in the 1970s? Energy, yes, but coal was even better than the rest:
Coal’s Cyclical Nature
Like most commodities, coal is very volatile and cyclical in nature. So it is very important to not mistake a temporary surge in price for a durable plateau.
Luckily, we are just exiting such a surge in price in late 2022. So what we see in the last quarter is a much more “normal” type of earnings than some sort of peak earnings that will soon crash.
Here at Cyclical Value Investing, we should also be paranoid about overinvesting in growing production, as this is typical behavior of cyclical commodities, to overinvest at peak prices and then see a surge in supply in already depressed prices.
Coal however has seen essentially no decent capex level since at least 2016. Considering the lag between capex and new mine capacity coming online, this means we are very unlikely to see a global glut of coal supply coming in the next 5 years at least.
Picking The Right Geography
Now, the other thing to worry about commodities is location.
Jurisdiction can make or kill a commodity investment irrespective of the more general commodity global prices.
It used to be that nationalization/stealing by autocracies were the main concern to have, giving mines in “premium” jurisdictions like Europe, the USA, Canada, or Australia a price premium as well.
A new type of risk recently appeared, the ideologically driven sabotage of profitable industries.
From canceled pipeline projects for no good reason, to carbon taxes and other fun stuff, the West is collectively very hostile to fossil fuels. For this reason, I am very uncomfortable in any Western-based energy company out of nuclear (and even then…).
You never know when a politician like Schulze might just decide to destroy his country’s energy infrastructure for a vote from climate-activism-driven politics.
So this always gives me pause when people ask me what I think of companies like Peabody Energy Corporation (BTU) or Arch Resources, Inc. (ARCH). If the company is great, but a president like Biden wants it dead, this will not go well. Just look at the series of canceled pipelines…
Just to make my point matching the news, John Kerry just announced: “The US will be stopping all new coal plants from being built and will be working to shut down existing coal plants.“
If Asia is the prime consumer of coal, better look at the prime coal countries in the region.
There are plenty of coal miners in India and China that could be a good pick.
The issues are different for each country, making me prefer alternatives:
China: coal miners in China tend to underperform in their production targets. My suspicion is that there is only so much production growth the Chinese mines’ geology allows for. China already maxed out its domestic production and knows it.
India: the country's stocks in general tend to be overvalued. It is also riding a narrative of India being the “next China/next superpower” which I disagree with. See my India report in 3 parts for more details. So I do not want to be anywhere near the blast zone when that narrative explodes mid-flight.
India courting the West for geopolitical alliance might also push it to stupid climate-related decisions.
Mongolia
Mongolia is basically Chinese coal but without the already depleted resources. The country exports almost all of its production to China.
So this is a bet not so much on coal demand than on CHINESE coal demand. This is quite fine by me, as I expect China to stabilize at a 5% growth rate for the foreseeable future.
Still, this makes Mongolia only my second-favorite geography for coal miners, as if China underperforms, but SE-Asia does well, they are unlikely to benefit from it, being unable to export by sea their coal.
Indonesia
Indonesian coal miners have a much more diverse pool of clients.
The local demand is exploding, and the largest Muslim country by population is in my opinion much more likely to become an economic juggernaut ahead of India.
(A full report on Indonesia would have been ideal as a companion to this report, but I failed to find the time for it yet, my apologies for that) - coming soon.
Luckily, the local demand is only part of the story. Indonesia is a constellation of islands, meaning that even internally, most coal production will reach population centers by sea. This also means that it can be easily redirected to export if needed.
If Indochina (Vietnam, Laos, Cambodge, Thailand, Malaysia) experiences massive economic growth, there is no shortage of neighbors eager for more energy. And then you have India and China (2.8 billion people) if that was not enough.
Conclusion
So when it comes to investing in coal, I highly recommend my readers to look in the direction of Indonesia, and then Mongolia.
Premium subscribers will see my pick of coal miners following this line of thought in the report I will send in the next few days.