Coal in the Commodities Market

Before the beginning of the 20th century, coal was truly the king of commodities. Coal was the dominant source of energy during the tumultuous Industrial Revolution. People still often associate the Industrial Revolution with images of coal mines.

Coal is now used primarily for electricity generation (steam coal) and steel manufacturing (metallurgical coal). Besides its practical uses in these two important areas, coal is an increasingly popular fossil fuel because of its large reserves. Specifically, companies in the United States have long touted the benefits of moving toward a more coal-based economy because the United States has the largest coal reserves in the world.

Source: World Energy Council

If you’re going to invest in coal-processing companies, you should select a company with heavy exposure in one of the countries with the most coal reserves. Specifically, because the United States, Russia, and China collectively hold more than 55 percent of the world’s total coal reserves, investing in a coal company with large operations in any of these countries gives you exposure to this important segment of the market.

Just because a country has large deposits of a natural resource, however, doesn’t mean that it exploits them to full capacity. As such, there’s a significant gap between countries with large coal reserves and those that produce the most coal annually.

Demand for coal is expected to increase during the first quarter of the 21st century. Most of this growth will come from the emerging market economies, particularly the economies of China and India, which will account for approximately 75 percent of the demand increase for coal. (China is currently the largest consumer of coal in the world, ahead of the United States, India, and Japan.)

Credit: Source: Energy Information Administration

Demand for coal has resulted in strong price movements in the commodity itself. Before the 2008 Global Financial Crisis, prices for coal experienced a major uptrend, going from $50 per short ton in 2006 to almost $200 per short ton in 2008.

The financial crisis resulted in a severe quasicrash scenario for coal prices, as was the case for several other important commodities. This correction was necessary because the rally was overdone on the way up; coal prices seem to have stabilized in the $100 range, but expect much more activity surrounding this commodity in the future.