Sharp Correction in Coal Prices Hits Listed Stocks

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A sharp correction in spot coal prices yesterday spread like a contagion across the world, triggering heavy profit taking in listed coal stocks, and then spreading into other resources sub-sectors. Nothing in coal's fundamentals has changed in the past few days, but spot prices had moved into frothy areas and were vulnerable to a blow off.

A sharp correction in spot coal prices on Wednesday spread like a contagion across the world, triggering heavy profit taking in listed coal stocks, and then spreading into other resources sub-sectors. Nothing in coal's fundamentals has changed in the past few days, but spot prices had moved into frothy areas and were vulnerable to a blow off.

The pattern is familiar to some investors by now; over the past year or so, blow offs have been seen in uranium, wheat, nickel, zinc, lead, rice, pork bellies, palladium, and cotton. As a rule, however, prices then tend to settle at levels well above the five year average.

Prices for benchmark Appalachian coal futures had risen by nearly 200% over the past 12 months, and even after Wednesday's correction of 9% at the close, are up by 25% in the past month alone. Most coal mined around the world is sold on a contractual basis, normally annual, but spot markets, as in the case of iron ore, are referred to as useful guides as to where fresh contracts will be fixed.

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