January 5, 2011
Brisbane, Queensland, Australia
Sometimes opportunity arises in the most bizarre (and unfortunate) circumstances. You’ve probably seen the news from Australia– a huge portion of the country is under water, and it’s a state of emergency.
Tim Staermose, our friend, partner, and resident investment guru, is on the ground in Queensland visiting family… always one to find the bright side in a dark situation, Tim recently sent along this email that I thought I would share with you:
Simon- I’m writing to you from the airport in drenched Brisbane having spent the last few weeks visiting family and friends on the Sunshine Coast.
With the weather we’ve had in Queensland (Australia’s most north-eastern state), a more appropriate name would be the “Rain Coast”. More than one third of this vast state is now underwater. That’s an area larger than France and Germany combined… it’s unreal, I’m sure you’ve seen the news.
The flooding has caused billions of dollars of damage, and the ramifications will be felt locally for many months to come.
The impact of these floods goes far beyond the local economy; the wall of water has also forced operations to a standstill across much of Queensland’s coal industry.
As of yesterday, seventy-three percent of the state’s coal suppliers have evoked the “force majeure” clauses in their supply contracts. In other words, circumstances beyond their control have made it impossible to make their promised shipments.
Coal is Australia’s second-largest export and Queensland is the country’s largest coal-producing state. Even more significantly, more than half of the world’s high-quality coking coal, essential in steelmaking, is mined in Queensland.
Needless to say, these storms are a big deal… and as unfortunate as the loss of life and extensive property damage is, there is also opportunity in this adversity.
Each ton of steel produced requires approximately 630 kilograms of coking coal, and Japanese, Chinese, South Korean, and Indian steel mills are already scrambling to secure adequate supplies to keep their plants running.
Coking coal prices are set to sky-rocket. Prices which last quarter were set at $225 a ton have already hit $246 in the spot market, and look to be headed to at least $300.
For high-quality coking coal suppliers in other parts of the world which remain unaffected by flooding, this will prove a bonanza. The two biggest suppliers of coking coal globally, after Australia (125 million tons), are the US (33 million tons) and Indonesia (30 million tons).
There may be opportunities for large profits from investing in coking coal producers in these countries. But the easiest way to set yourself up to profit from higher global coking coal prices is to buy shares in Canadian mining giant Teck Resources (TCK on the New York Stock Exchange).
Teck is the second-largest exporter of seaborne traded hard coking coal in the world and should benefit tremendously from the shortages and price-hikes created by the extensive flooding in Queensland.
There are also two coal ETFs (exchange-traded funds) listed on US stock exchanges: KOL, and PKOL. But while momentum-chasing investors may well bid their prices up, they offer far less exposure to coking coal than Teck.
That’s because the companies comprising these baskets of coal stocks are far more heavily skewed toward steaming coal production. That’s a completely different product from coking coal and is used to generate electricity rather than make steel… so be wary.
Simon again. We wish Tim well in his travels out of Queensland and sincerely hope that the situation improves soon for everyone there. Meanwhile, we’ll have much more insight about this opportunity in this month’s edition of our premium service, Sovereign Man: Confidential, so stay tuned.