The markets have changed considerably in the past 24 months. Record high debt levels in some of the world's largest economies and constant government intervention in both the public and private markets has made investment decisions more complex. If you are taking responsibility for your financial well being, awareness is king and trends or 'momentum moves' cannot be ignored.

Timing the rise and fall of different sectors has been the name of the game over the past two years. Blatant examples of this are the gold and rare earth sectors. Positioning yourself early in a soon to be robust sector is where the big money is made.

Simplification and the timing of obvious sector runs is our business and how we've delivered winning investment opportunities time and again. Our next commodity of focus (and sector specific commodity) which we believe will outperform many of its counterparts in the coming years, is coal.

We believe the below list captures more than we could ever put into words to make you aware of coal's importance. Below are countries which rely heavily on coal to provide electricity.



The USA, China, India and Germany derive almost half, if not closer to three quarters, of their electricity from coal. Those 4 countries make up more than half the world's population and close to 50% of the world's GDP.

EIA (Energy Information Administration) has forecasted that global coal consumption in the electric power sector will grow by 6 percent in 2010, due to the result of higher electricity consumption.

How can this be with all the renewable energy efforts across the globe?

Coal is the cheapest source of energy that exists; it is convenient, found all over the planet and the vast majority of the world has the available technology and capital to mine it. The second part to the answer is that no one could have predicted the speed at which the emerging markets have risen and the demand for cheap energy which has come along with that growth.

Before we talk about the global demand trends for coal and the amazing growth set to occur within this sector, let's refresh on what types of coal exist and the primary uses.

Coal has many important uses worldwide; the most common being electricity generation, steel production and cement manufacturing. Roughly 5.9 billion tonnes of hard coal was used worldwide in 2009. There was 909 million tonnes of brown coal used that year.

Our team at Pinnacle expects a very strong M&A (merger and acquisition) market for coal in the coming decade. China recently revealed a 3.8 billion tonne increase in coal demand by 2015. Remember that the entire worldwide consumption was 5.9 billion tonnes of hard coal in 2009, along with 909 million tonnes of brown coal. China alone has plans to increase global consumption by more than 50% in 4 years!

This is a staggering statistic and one that can't be overlooked by investors.

Global coal consumption has grown faster than any other energy source since 2000.

There are two main types of coal and two main uses of coal. Steam coal, which is known as thermal coal, is mainly used in electricity generation. Coking coal, which is known as metallurgical coal, is used primarily in steel production.

Coal provides 27% of global primary energy needs and generates 41% of the world's electricity.



The US Coal Market

The US Energy and Information Administration, known for Independent Statistics and Analysis, is a leader in all information on energy in the United States. Below is an excerpt (from EIA stats) which outlines the spike in domestic (USA) demand for coal.


Strong global demand for coal, particularly metallurgical coal used to produce steel, has resulted in sharp increases in U.S. coal exports in 2010. Metallurgical coal exports have nearly doubled in the first half of this year compared with the first half of 2009, and metallurgical coal's share of total coal exports has grown from 52 percent in 2008 to a projected 73 percent in 2010. EIA expects total coal exports to increase by 30 percent in 2010, but decline in 2011 as other major coal-exporting countries increase their supply to the global coal market.


The strong global demand for coal is also a significant factor in the decline of U.S. coal imports in 2010. Coal imports fell by 16 percent in the first half of this year and EIA expects the annual decline in 2010 to be nearly 17 percent below 2009 imports. Colombia, the largest supplier of U.S. coal imports, began exporting sizeable quantities to Asian markets, especially China, in response to a combination of higher prices in Asia and lower freight costs. EIA forecasts coal imports will recover next year, with growth of 37 percent. However, the annual import tonnage (26 million short tons) remains significantly below the 2005-through-2008 average of 34 million short tons.


Just like with uranium and oil & gas, the United States will have to begin depending more on its own (domestic) coal reserves. Emerging markets continue to accumulate coal at record levels with no sign of slowing.

An example of a company taking advantage of the booming coal market was the recent $3.2 billion takeover (cash and stock bid) Walter Energy put forward to buy Canadian based Western Coal Corp. Walter Energy believes deeply in the continued demand for metallurgical coal in the BRIC countries, in particular, China, Brazil and India.

On a conference call last week, Joe Leonard, Walter Energy's interim chief executive, made a prediction that world steel production will increase by 50% over the next 10 years on the back of continued economic growth in China, Brazil and India.

Key Fact: China, USA, India, Japan and South Africa account for 82% of total global coal use.

Last month, BMO Nesbitt Burns announced that it's intensifying its focus on the coal sector. Egizio Bianchini, BMO's head of global metals and mining investment banking, stated, "Coal for us is a really big industry." He went on to note that, "There are some trends in coal that if they continue will make coal companies much bigger and more profitable."

In respect to mergers and acquisitions, Mr. Bianchini made some interesting comments. He explained that there could be consolidation in the U.S. coal sector. This would favour small-cap, potential near-term producers.

Naturally, this shared sentiment has motivated our team to find potential takeover candidates and/or near term producers.

Joe Govreau, Industrial Info's Global VP for Metals & Minerals Industry research, recently took part in an exclusive interview titled, "Navigating the Currents of Change." The main message derived from the interview was that demand for coal is starting to rise after a prolonged slump, and this positive trend seems likely to continue into 2011.

Wood Mackenzie, a research and consultancy firm reported last week that, the US is likely to overtake Australia and Indonesia as the centre for coal mergers and acquisition (M&A) activity.

There have been a total of 27 deals in 2010, compared to 25 in 2009, with single-asset transactions accounting for 15 deals - up 50% on 2009 levels.

The majority of coal M&A transactions have been focused in Australia and Indonesia (likely to shift to the USA).

Wood Mackenzie, Head of Coal Supply Research Gerro Farruggio stated that, "The US continues to be the global hotspot for corporate deals in the coal sector. The total disclosed US corporate consolidation spend has been $2,3-billion in 2010, compared with $4,2-billion in 2009 - all on metallurgical coal resources."

India Coal Market

It has been reported that India's coal demand may more than triple in the next two decades as Asia's second-fastest growing major economy seeks the fuel to generate electricity and run steel and cement plants.

Coal Minister Sriprakash Jaiswal, said that the nation may consume more than 2 billion metric tons of coal by 2030. India produces 530 million tons of the fuel a year and imports about 67 million tons annually. Coal currently engages 53 percent of installed power generation capacity in India and the government expects the fuel to remain the most important source of energy for the country.

According to Deutsche Bank AG, India and China may become the dominant importers of coal during the next 10 years, displacing Western nations.

India's coal output is expected to rise to 1 billion tons a year in the next eight to nine years, according to Jaiswal. That's 30 percent of China's estimated annual production this year.

Jaiswal also commented that, state-owned Coal India Ltd., the world's biggest producer of the commodity, plans to buy mines in Indonesia, Australia, South Africa and the U.S.

Partha Bhattacharyya, chairman of Coal India, said that India's coal purchases from overseas are expected to grow to 200 million tons by March 2016 from 80 million tons planned in the year ending March 2011. Bhattacharyya also mentioned that rising demand in India may drive up international coal prices.

Coal is used to fire 87,858 megawatts of India's installed capacity of 164,509 megawatts as of Aug. 31, according to the Central Electricity Authority.

Coal is the primary source of energy, accounting for about 67% of the total energy consumption in the country.

The bottom line with India is that demand for coal has been rising at an annual rate of 6 percent since 1992-93. This is similar to the majority of emerging markets and smaller economies across Asia. It is the easiest and cheapest form of electricity for these economies to create and will continue to be favoured above all other forms.

China Coal Market

China is the world's largest producer and consumer of coal. China uses coal to operate more than 80% of its power plants and to make steel. Bloomberg quoted China National Coal Association as saying that China may consume between 4% and 6% more coal by 2010 on continued economic growth. We believe this to be an understatement. China is famous for saying one thing and doing another in order to keep prices favourable to its interest.

Mr Zhang Guobao, director of National Energy Administration, said that China's energy demand may rise 3.6% in 2010. Again, we find this hard to believe (too conservative) with an economy as robust as China's and hundreds of millions of citizens moving from the countryside to cities each year.

China National Coal Association said that the country's coal production capacity may expand by almost 300 million tonnes in 2010. This does not surprise us at all. As we mentioned above, China recently revealed plans to increase its coal demand by 3.8 billion tonnes by 2015.

The energy demand from coal is heating up faster than we could have imagined. We believe the bull-run within this sector is still in its infancy. We continue to remain exceptionally bullish on commodities as we know the government's efforts to devalue the US dollar will ultimately succeed to one degree or another. China, India and Brazil are experiencing exceptional growth and coal is at the heart of these countries' energy demands. The coal sector, in the short to medium-term, is one to be taken advantage of.