Coal, the New Gold

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In line with increasing recognition that commodities are an identifiable "asset class", seven years into the commodity prices supercycle, investors and speculators are increasingly sophisticated in sector rotation. Where oil majors and big gold stocks have long been known and recognised as equity investments, the newer wave of capital flows has identified listed coal stocks and listed iron ore stocks as the plays of 2008 - so far at least.

Over the past year or so, listed coal and iron ore stocks have attracted fierce attention, in line with a rotational switch out of equities exposed to copper and, most certainly, uranium, and more recently, to gold and silver...

Since early March this year, investment and speculative players have increasingly indicated a growing belief that the global credit crisis is moving closer to a floor, and, more recently, that US rate-cutting is nearing an end, underpinning a dollar that should at least find a floor. But energy prices have remained high not least on signs that oil suppliers are prepared to do little, if anything, to increase output, and on persistently growing demand from emerging markets, led by China.

The structural increase in demand for energy raw materials (led by oil, natural gas and coal) has spurred persistent increases in prices for the past decade. Price trend lines have occasionally moved into mania mode, in line with similar developments in other commodity prices (rice currently; uranium, last year), and even in some equity markets (the Shanghai Composite Index is currently half its level of October 2007).

In line with increasing recognition that commodities are an identifiable "asset class", seven years into the commodity prices supercycle, investors and speculators are increasingly sophisticated in sector rotation. Where oil majors and big gold stocks have long been known and recognised as equity investments, the newer wave of capital flows has identified listed coal stocks and listed iron ore stocks as the plays of 2008 - so far at least. Oil and gold stocks were earlier plays...

The economics for coal (and a number of other commodities, not least iron ore) are dictated by the physical logistics of moving huge tonnages of bulk commodities. The seaborne coal and iron ore markets are dominated by relatively few players that have spent literally decades of poor pricing developing pricing mechanisms that are currently powerful and effective. In general, coal prices have doubled in the past year. BHP Billiton (BLT LN, GBP 18.76 a share), the world's biggest diversified resources stock, recently announced that it was concluding metallurgical coal contract prices for 2008 that were 206% to 240% higher than 2007 prices.

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