The Bull Market in Coal — And Locking in Gains in Potash, Mechel, and NII Holdings

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Despite its status as the most "environmentally incorrect" source of energy, coal provides 25% of the world’s energy and generates about half of the electricity in every state in the United States, except California. Coal plays a key role in the production of steel, with approximately 70% of the global steel production depending on coal as a source of energy.

And the price of coal has been soaring to record levels. Macquarie Bank expects metallurgical coal to reach an average price of $150 per metric ton in 2008. Citicorp is even more bullish, forecasting that the annual contract price for thermal coal will reach $100 per metric ton in 2008, while the price of metallurgical coal may hit $200 per ton. (Thermal coal is used for heating and power generation. Metallurgical coal is used in steel manufacturing). Benchmark prices for some grades of thermal coal already have hit the $100 per metric ton level — double September’s price. Metallurgical coal has even tripled in some cases.

What’s behind the bull market in coal?

First, demand for coal is exploding. South Africa and fast-growth Eastern European economies rely heavily on coal as their main energy source. Even slow-growth Western Europe’s demand for coal increased 15% in 2007. But the real story is in China. Coal supplies 80% of China’s current power capacity, even as China is building seven coal fired plants a month. Even in the best of times, there just isn’t enough oil to fuel China’s exploding economic growth — and coal is playing an ever increasing role as a source of energy.

Exclusive  American Manufacturing Champion on the Global Stage

Second, global coal supply has been afflicted by a broad range of supply disruptions. China has temporarily shut down its mines as a result of its recent devastating earthquake. Reports indicate that China is now down to a 12-day supply of coal. In addition, in April, China officially announced it would close coal factories, a 125-mile perimeter around the Olympics site of Beijing between July 20 and August 24, 2008, to reduce emissions, pollution, and smog during the Olympic games. In addition, Australia, for years the world’s leading exporter of coal, has also been suffering from poor weather, which has disrupted coal production and transportation in its crucial coal-producing state of Queensland.

Exploding demand combined with supply disruptions adds up to one thing: higher prices for coal.

So buy the Market Vectors Coal ETF (KOL) at market today, and place your stop at $43.50. For even bigger potential gains, buy the October $60 calls (KOLJH.X). This ETF enables you to buy a basket of 39 coal-related companies from 12 different countries. Although the soaring prices of U.S. coal stocks means that its biggest weighting is in the U.S.(52.9%), KOL is a solid global pick. As of March 31, 2008, the ETF has a weighting in Hong Kong/China (17.6%); Indonesia (11.4%); Australia (6.5%); and the United Kingdom (2.0%).

PORTFOLIO UPDATE

With the price of Potash (POT) closing at $207, and the June $180 call options nearing expiration, sell your remaining options to lock in your 112.08% gains. We may add some more longer dated Potash options later on with any pullback in the stock.

Exclusive  A Solid Performance From The Global Bull

Russian Steel maker Mechel (MTL) jumped more than 8% on Friday, and the stock is up 20.58% in the last month. It’s always good to take profits in options after sharp jumps in share price. Sell half your options here for a quick 60.11% gain.

NII Holdings (NIHD) is up 16.40% in the past three weeks. Hold on to this turnaround play for now, but sell half your options for a quick 59.74% gain.

The rally in the Japanese yen is faltering as global markets recover. So sell your remaining options in the CurrencyShares Japanese Yen Trust (FXY) at a loss. But hold on to the ETF itself for now as a hedge against market downturns.

P.S. Join my Eagle Publishing investment colleague Mark Skousen and me for FREEDOMFEST 2008, "The Trade Show for Liberty," on July 10-12, 2008, Bally’s/Paris Resort. FreedomFest will feature more than 88 speakers, 100 exhibitors, and 1,000 attendees. Guests will include John Mackey, CEO of Whole Foods Market, Congressman Ron Paul, a 2008 Republican candidate for president, Steve Moore, of The Wall Street Journal editorial board, David Boaz, vice president of Cato Institute, Robert Poole, Jr., of Reason Foundation, Jeremy Siegel, "The Wizard of Wharton," and Rick Rule, one of the country’s top money managers. Also hear Frank Holmes, Doug Casey, Larry Abraham, Ron Holland, Frank Trotter, Bert Dohmen, Keith Fitz-Gerald, Peter Zipper, John Mauldin, and many more.

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