*The ‘bull market’ argument for coal gathers steam

*Trend problems to ponder

From Gareth Stokes, MoneyWeek editor, SA

Dear MoneyMorning reader

“The trend is your friend,” rings an oft-repeated snippet from the world of market lore. It suggests all you have to do to make money is base your buy and sell decisions on the prevailing market direction. What this useful anecdote doesn’t reveal is when an established trend ends and a new one begins. And we can think of two more ‘trend’ problems for you to ponder.

The first is share price volatility. Investor website www.investopedia.com defines volatility as “the amount of uncertainty or risk about the size of changes in a security’s value.” High volatility means that prices can change dramatically over a short period of time. And volatility tends to skyrocket during times of uncertainty. Throughout the current financial crisis blue-chip shares like Anglo American, Sasol and SAB Miller have repeatedly moved more than 5% in a single day’s trade. The US S&P 500 Index exhibited super volatility in the last quarter of 2008 too. The index recorded 18 daily moves (up or down) in excess of 5% for the period. According to Standard & Poors such levels of share price activity haven’t been witnessed in 53 years!

Our second ‘trend’ stumbling block is rooted in the question: “What constitutes a market correction.” If you’re bullish on a particular commodity – platinum for example – there are chances you’d refer to its recent price decimation as a ‘correction’ in the long-term bull trend. In the absence of a rigorously applied correction rule you could argue that every commodity (and most shares) is in a bull market (or rising trend) in perpetuity. Gold bulls are notorious for this attitude… Whatever the price does, they simply claim “gold remains in a long-term bull trend!” The same argument applies to oil. A fundamental assessment of the commodity suggests a long-term uptrend remains despite its pullback from $147 per barrel to the mid-$40s. But we’ll leave these arguments to the purists… Our job is to find ways to turn these rants into money!

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And we’re going to do that by predicting a rising trend for coal. It’s not too difficult to motivate under current market conditions. The price of export coals has fallen in line with other fuels and hard commodities of late. Although the market is soft right now, the fundamental arguments for the commodity remain intact. As the global economy rebounds and prices return to ‘normal’ levels we expect the coal miners to return to profit with a vengeance.

South Africa will be particularly good for companies mining the fossil fuel in the next decade or two. The reason is state power utility Eskom, which will burn through tonnes of the stuff to meet the country’s electricity requirements. Reuters reports that “South Africa will need to invest up to R110bn in coal mining by 2020 and dig at least 40 new coal mines” just to keep up with demand! By that time Eskom – the company’s new coal fired plants, Medupi and Kusile, will come on stream in 2015 and 2016 respectively – will consume 200m tonnes per annum to keep its coal fired power stations going.

The share we like in the coal sector is Exxaro Resources Limited (JSE: EXX). If you want an ‘all coal’ play linked to South Africa’s power equation then you cannot do better. The company produced 36 700m tonnes of ‘power’ coal in 2008, of which 36 255m tonnes went directly to Eskom! Its exposure to coking coal (aka the steel industry) is limited, with only 2 650m tonnes produced in 2008. What we really like is that the company develops coal opportunities in ‘partnership’ with Eskom. Exxaro recently concluded a 40-year deal “for the supply of 14.6m tonnes per annum of power station coal to Eskom’s Medupi power station!” Priced at R65 per share Exxaro is a top choice.

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Turning to the markets

The JSE all share index closed up 2.87% yesterday. The gold mining index rose 2.38%. Resources gained 2.31%. Banks and financials added 7.38% and 4.59% respectively. Industrials rose 3.06% and the platinum mining index surged ahead 3.3%.

London’s FTSE100 closed down 0.58%. The Dow Jones closed flat 0.06% and the Nasdaq climbed 0.98%.

Tokyo’s Nikkei closed 1.76% up. Hong Kong’s Hang Seng lost 0.48%.

Brent crude is currently trading at $42.22 per barrel.

Spot gold’s trading at $913.76 and platinum was last quoted at $1,048.50.

And here’s how the rand is performing against the major currencies:

R/$ 10.08
R/£ 13.98
R/€ 12.95

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