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Last
week the Bush administration declared polar bears as threatened species,
acknowledging that global warming jeopardizes the species' livelihood as a
result of rapid Artic sea ice depletion. The polar bear serves as a symbol
for those who view climate change and global warning as the most important
issue of our time. On the contrary, the panda represents China's seemingly insatiable appetite for
consuming raw materials, with the world's resources being further strained by
the unprecedented growing masses of people in India and other developing
nations increasing their standard of living with their financial upward
mobility out of poverty.
So you have the interests of those who
want to limit carbon emissions pitted against one-third of the world's
population, whose ideal pursuit of the life is modeled
after the lifestyle experienced over the past century by citizens in
developed countries, will undoubtedly lead to increased carbon use in the
short term. There really is no contest here--the panda is going to devour the
polar bear. I am merely speaking in symbolic terms because there is also
contradicting evidence suggesting the polar bear population may be under no
real threat at all.
In Kevin Hassett's
Bloomberg commentary titled, "Polar Bears Threatening to Deliver
Us $200 Oil," he captures the causes for
concern associated with this ruling:
"The polar bear could, in theory at
least, stop everything. Suppose someone wants to build a coal-burning power
plant in Florida.
Environmentalists might challenge the construction on the grounds that the
plant will emit greenhouse gases leading to global warming and an increased
threat to polar bears. It is hard to say how such challenges would play out. My
guess is that it would heighten the pressure on the U.S. to adopt
a cap-and-trade emissions program or a carbon tax."
Yesterday, the Wall Street Journal
reported, "Congress is considering several measures that would impose a
so-called cap-and-trade system, which would limit the amount of carbon
dioxide companies are allowed to emit. Lawmakers this summer is expected to
take up a bill sponsored by Sens. Joseph Lieberman
(I., Conn.)
and John Warner (R., Va.) that initially gives the
power industry about half the allowances it needs and requires generators to
purchase the remainder on an open market or cut emissions."
Such talk brings immense joy to the
panda. Whatever limits the US Congress may impose that could result in lower
domestic coal and other fossil consumption will more than be offset and
graciously welcomed by the developing world. For environmentalists, this is
"Whack-o-mole" times 10. For every coal plant we do not build in
the US,
10 are being built worldwide. China
and India
are adding a coal-fired power plant every week. China in expected to boost power
capacity by 40% in just three years. According to a Bloomberg
article, "China is
adding the equivalent of Japan's
power capacity to meet the needs of the world's fastest-growing major
economy. The country may increase spending on power plants and grids by at
least 9.3 percent this year."
The developing world rejoiced at the
twin errors US lawmakers made last week. The second blunder was deciding to
no longer add supply to the US
strategic petroleum reserve. This simply means more coal and oil for them at
a lower cost. They will gladly absorb any decrease in demand in the developed
world, as a result of climate concerns or otherwise. Our net incremental
increases in carbon emissions simply pales in comparison to what we can
expect as the result in growth from China,
India
and the rest of the developing world.
The widely-held belief that nuclear
operators need greenhouse gas legislation to further in order to proceed with
more plants is equally flawed. The world will be starving for energy sources
in less than two years. The polar bear will be a distant memory as the supply
for energy is no longer able to keep up with demand. No legislation is
required. You are going to see more nuclear power plants sprout up all over
the world than you could ever imagine. The problem is that we are five to ten
years away from nuclear power having any meaningful impact; however, we are
less than two years away from energy shortages. This will definitely get the
US Congress moving. Remarkably, the problem might actually be worse in the US than in
some other countries where you might expect it. A LA Times
article written last week observes, "With so much resistance, coal plant
construction has ebbed in the US.
Be prepared for brownouts." This is not a US story (or a developed world
story for that matter). The inevitable is beyond the control of
environmentalists or any other group to hinder at this point. We in the US must learn
that we are no longer in control of our destiny. In less than two years, we
will be confronted full throttle with immense issues as figuring how to
generate power, fuel our transportation needs, and feed our citizens. Accompanying
spot shortages will produce intensely straining higher prices.
If you think China
and India
are going to actually limit their carbon emissions, you could not be more
wrong. A month ago, Bloomberg
reported that India has
rejected a proposal supported by the US
and Japan
to curb global warming by replacing national limits on carbon dioxide
pollution with targets for individual industries. Earlier in April, China had
rejected a similar proposal. It is quite telling to further explore the
concerns of Japan versus
those of India.
(Bloomberg)
The citizens of Japan are
outright scared. A recent survey revealed that 80% of their population
believes that they are not going to have adequate energy supplies over the
coming decade. Japan
is almost totally dependent on other nations for their fuel supplies. They
are now becoming a leading proponent of clean coal technology. In early July,
when the G8 next gathers to focus on climate concerns, Japan is
widely expected to push for the "urgent deployment" of carbon
capture and sequestration of carbon-dioxide generated from coal-powered
energy plants. This is recognition that a continued reliance on coal over the
near term is unavoidable.
If Japan
represents the needs of a resource-dependent developed economy, India
represents the needs of a resource rich, developing country. But, despite the
fact that they have strong domestic coal supplies, they are in almost frantic
search of even greater supplies. China, who also has significant
coal reserves, became a net importer of coal earlier this year for the first
time in their nation's history. The cute little panda is growing into a scary
devouring beast. India is
largely viewed to be less than ten years behind China in their growth curve. India can be considered another China forming
in the winds. It is a cute furry tiger cub trying to catch up with the
adolescent panda. Infants are known to have their growth spurts, too. Frank
Holmes, in the most recent Weekly Investor Alert
issued by US Global Investors, notes, "Stockpiles of coal at coal-fired
generating stations in India
continue to dwindle, with just nine days of forward cover on the ground,
compared with the normal 22-day normal level this time of year." The
Times of India recently presented a story titled, "Coal Shortage to Fuel Power Crisis,"
where they revealed that "the country is already facing about 14% power
shortage at peak hours." Due to failure to secure supply and poor
infrastructure, this number is expected to increase.
You can bet that India is
going to eventually fix its infrastructure, gobbling up massive quantities of
natural resources along the way. This might account for why India's coal
and power generation companies are scouring the world for additional coal
supplies. State-run NTPC, India's
top power producer, for example, is looking to buy majority stakes in
Indonesian coal mines to secure supplies. Power Trading Group, Tata and Reliance Power are also buying coal mines in Indonesia. Bloomberg
reports that a coal India-led group plans to visit Mozambique to examine purchasing
coking-coal mines. Coking coal is the type of coal that is required to make
the steel, which will be needed to build out its currently skeletal
infrastructure. The scale of resource consumption we are on the brink of is
almost impossible to fully comprehend. There is clearly a resource race to
secure both thermal and metallurgical coal underway. China just announced
that it is "struggling to ensure steady fuel supplies to thermal power
producers, because the price they pay is not fully in line with market
prices," according to the country's top energy policy maker. (Reuters)
Coal producers around the world will be
big winners. A tremendous opportunity still exists to invest in US domestic
coal producers, which has clearly shifted out of their two-year consolidation
pattern where environmental concerns largely weighed share prices down. But
that was back when we lived in a US-centric world. Earlier this year, we saw
prices for both met and thermal coal catapulted higher. Thermal prices have
doubled in some parts of the world, while prices for met coal have tripled. What
ignited the rise in the US
coal stocks was largely caused by higher US
coal prices related to a surge in exports from the US
to Europe. This surge is expected to not
only be sustainable, but to grow as we improve our port infrastructure and
ability to export more.
This story just got even more bullish
today for two reasons. First, with oil approaching $13O/bbl, natural gas and
coal prices tend to rise with them. Second, and even more importantly, South Africa
just announced that they might limit exports! (Bloomberg) South Africa
has the world's second-largest coal exporting terminal. Supplies were already
being re-routed from Europe to Asia, which accounts for Europe's new found
reliance on the US
for coal. This second issue is part of a larger problem for countries which
import various forms of energy. As discoveries become harder to come by and
reserves becoming increasingly depleted, energy-exporting countries are signaling that more of their coal, oil and natural gas
are going to be hoarded for domestic consumption, especially as the economies
of many of these countries continue their economic expansion.
As far as coal goes, this is the
investment opportunity of a generation as exports begin to surpass levels
last seen in the early 1970s. As news of South Africa begins to sink in,
we should see prices soar. This is not at all priced in as analysts expected
that we would experience a plateau in prices after the recent tripling in
price. Getting back to India,
Bloomberg
just reported earlier today:
"Any further rise in global coal
prices will be a cause for 'grave concern' to Indian importers, said R.S.
Sharma, chairman of NTPC Ltd., the nation's biggest power generator. The
company plans to import more than 5 million metric tons of coal in the year
to March 2009, Sharma said in a phone interview from New Delhi. 'If a supplier the size of South Africa
cuts exports, it's going to raise prices and hurt everyone's plans,' Sharma
said. NTPC imports most its coal from Indonesia
and Mozambique."
The prosperous prospects for the sector
were summed up nicely by Dahlman Rose & Co's bullish domestic analysis of the
coal mining sector when they wrote:
"The investment thesis for
coal-mining companies is twofold, with support from the domestic power
sector's current state of affairs and from a rebirth of the U.S. as a major
player in both the international metallurgical and steam coal markets. We
believe that export/global factors are supporting the overall thesis for now,
and that fundamental issues in the domestic market are being masked and are
yet to play out fully. We believe the recent run-up is supply/demand driven,
not speculation. Coal's strength in the last several months, both the
commodity and the equities, has occurred parallel to strength in other
commodities that many blame on speculation more than fundamentals. While a
popular investment strategy has been to be long commodities in a weak dollar
environment, we believe the strength on the coal side is warranted. Our
research indicates that coal supplies world-wide have continued to tighten
even as supply becomes more constrained, and we see no relief in the near
term."
US Eastern coal prices ended last week
with a record advance as exports climbed.
In the new "Non-US-Centric
World," the polar bear enthusiasts would be better served by redirecting
their efforts from curbing greenhouse gas emissions to focus exclusively on
developing new sources of energy. We are probably already beyond peak oil
production and are rapidly approaching peak coal production. As coal and
natural gas increasingly become part of the short term liquid transportation
fuel solution their reserves will also rapidly diminish. With the growth of
the panda, the tiger and the rest of the developing world, it will quickly
become obvious to all that the concerns over energy supplies meeting demand,
more than concerns over the environment and global warming, will necessitate
and lead to developing new forms of usable energy. By focusing on producing
energy innovations--fuel cells, wind, solar, and other renewables--rather
than fighting the losing battle of fighting to curb fossil fuel consumption
against the panda and the tiger, environmentalists are more likely to achieve
their objectives in preventing man-made climate change.
As far as handicapping any sort of a
timeline, I think that we are close to a tipping point. The only thing that
is going to end this rally is a collapse in physical demand. Physical demand
is the demand associated with the price consumers around
the world are willing to pay to consume the product. We are seeing no
signs of any appreciable decrease here. What you are about to witness is a
massive flow of funds out of almost every other investable
asset class into commodities. This represents investment demand. At some
point investors/speculators will drive up the price of commodities so high
that it will bring about a collapse in physical demand and a worldwide
recession will result. I wrote about the time frame I expect this to occur in
my commentary titled, "Commodity Boom You Ain't Seen Nothing Yet." For
now, I intend to aggressively add to my existing coal mining positions in the
both the core Global Megatrends Portfolio and in
the Trading Portfolio.
Hint: You don't have much time to take
advantage of this investment opportunity of a lifetime. In my research, I
have identified five sectors which I believe stand to benefit the most. Coal
(and other energy) is one group. To learn more about the other sectors you
are invited to take a look at Global MegaTrends
Portfolio.
*For more, I was just interviewed about
coal on the Market Neutral podcast. Link: http://www.greenfaucet.com/market-neutral-kurt-kasun-coal-interview
Kurt Kasun
www.greenfaucet.com
A
contributing writer to GreenFaucet.com, Kurt Kasun writes a high-end investment timing service, GlobalMacro, which is focused on identifying
opportunities that produce returns in excess of market with reasonable risk.
He is strategically located in Washington,
D.C., a key to maintaining
contacts and relationships which help Kurt understand global policy and
economic factors as they emerge. His investment approach has always been
macro in nature largely due to his undergraduate studies at the U.S. Military
Academy at West Point (B. S.
National Security, Public Affairs, 1989) and his graduate studies at George Mason University
(M.A. International Commerce and Policy, 2006).
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