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Why Global Steel Demand Is Increasing Your Energy Bill

By Ian Davis
Monday, May 5, 2008

The latest news coming from local electricity companies is a lot like a kick in the teeth for most people... after they've been knocked to the ground.
 
Last week the Associated Press reported, "Utilities nationwide are raising rates and are likely to push for even more dramatic increases in electric rates in the coming months."
 
Americans are already strapped for cash due to rising gas and food prices and a sinking real estate market. So why's electricity joining the scrum?
 
Well, a large part of the blame lies with steel... As I wrote last week, steel prices worldwide are skyrocketing. This week, we're going to look at one of the ramifications of soaring steel prices... soaring coal prices.
 
Coking coal is the type of coal used in steelmaking. Demand from steelmakers is driving prices higher. In fact, many steelmakers, including the world's second-largest producer (Nippon Steel), recently agreed to pay triple what they previously paid for coking coal.

Take a look at the following chart of coal prices since 1996...
 
 
 
The Global Insight coal index doesn't contain any U.S. coal – it's 60% South African, 30% Colombian, and 10% Australian. But the market for coal, like oil, is global. When the price of foreign coal spikes, the U.S. exports more of its coal... resulting in higher U.S. prices.
 
So the steel rally has swept coal along with it. But coal prices have not yet gone parabolic like steel prices. Does that mean coal is a good buy for people who are bullish on steel?
 
Trend followers might find coal attractive. But there's no easy way to bet on the price of coal except through coal stocks... And coal stocks are expensive right now.
 
Take a look at the following chart...
 
Coal Stocks are Expensive
 
Investors are excited about the coal industry and have bid up the price of coal producers in relation to the price of coal. And any falter in the growth rate of coal prices could lead to a sharp drop in these stocks. So here's how to play the coal boom...
 
Wait for just such a pullback before buying your favorite coal stock. A few of the big names are Peabody (BTU), Consol (CNX), Massey (MEE), and Arch (ACI). Or you can buy a basket of coal producers with the Market Vectors Coal ETF (KOL).
 
Coal produces about half of all the electricity generated in the U.S. With coal prices soaring, it's likely you'll feel the effects of soaring coal prices in your electricity bill... But if you buy coal producers at the right prices, you should see some profit, too.
 
Good investing,
Ian Davis




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The Brazilian momentum trade is on... nearly all NYSE-traded Brazilian shares sitting at all-time highs.
 
The U.S. transport trade is on... nearly all railroads and truckers at 52-week highs. Bullish vote for U.S. economy.
 
Eastern Europeans are still drinking... huge vodka producer Central European Distribution at all-time high.
 
Big day for gold shares: Mining giant Goldcorp releases earnings today.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

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52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
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S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

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Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%