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Here in the highly volatile commodities space -- where fortunes can turn mercilessly on a dime -- it's nice to know when you have a friend you can count on.
My readers know that I am fond of the mantra: "The trend is your friend."
Whether I'm cautioning Fools against shorting gold when they perceive a near-term peak, or reassuring investors during the financial crisis that China's commodity demand growth would promptly resume, I encourage folks to focus intently upon the clearest and most immutable trends within the sector.
Although we are continuing to witness a strong secular bull market in just about every commodity out there, metallurgical coal remains a noteworthy standout that commodity-focused Fools will want to track very closely. The strongest trends, of course, are your strongest friends.
To be sure, met coal has already enjoyed quite a run here. Since I urged Fools to prepare for the met-coal surge with an attractive Pacific-basin player like Teck Resources (NYSE: TCK ) , that stock has doubled in less than a year. Since I championed Alpha Natural Resources (NYSE: ANR ) as the leader of the met-coal pack in August, those shares have surged more than 40%. The long-standing consolidation trend in met coal has made its presence felt in deals like Walter Energy's (NYSE: WLT ) $3.2 billion bid for Western Coal, and the market continues to anticipate an acquisition of Massey Energy (NYSE: MEE ) . At last glimpse, the leading contenders in the quest to nab Massey appear to be Alpha and Arch Coal (NYSE: ACI ) .
The hugely destructive deluge in Queensland, Australia, has hampered met-coal production and exports in an area responsible for some 50% of worldwide production, and prices for Australian product have nearly surged to their 2008 pre-crisis peak in response. Analysts are beginning to mull 2011 price levels of more than $300 per ton as the impacts come into clearer view, while some are calling for a far more substantial spike.
Alpha to the rescue
Alpha Natural Resources finds itself particularly well positioned to supply an increasingly tight seaborne market with expanding met coal volumes. Alpha raised the midpoint of its 2011 production guidance for met coal by 10% last week, and now expects to ship between 13 million and 14.5 million tons of the steelmaking ingredient by year's end.
As substantial as the flood-related supply disruptions in Australia appear to be, and despite the extent to which this market was already acutely undersupplied before the floods even struck, I do not wish to see investors basing their decisions on that one development alone. As Peabody Energy (NYSE: BTU ) has explained, we are in "the early stages of a long term supercycle". Enhanced demand for U.S. met coal as a result of the flooding may permit one to tweak an existing investment thesis, but at the end of the day only the long-term trend is your friend to the end.