Just as it's impossible to discuss jazz music without analyzing the role of John Coltrane, you can no longer fully grasp the overall energy bull market without looking at coal.
As a steady stream of industry experts forecasts major shortfalls in the global supply of coal, the sector has been stoking its furnace lately. Consensus is rapidly growing that we are in the early stages of a multiyear event for coal, and investors have boarded the train in droves. Shares of Massey Energy (NYSE: MEE ) have quadrupled since last summer, while Patriot Coal (NYSE: PCX ) has enjoyed a similar trajectory since emerging last November as a spinoff from Peabody Energy (NYSE: BTU ) .
Mining equipment maker Joy Global (Nasdaq: JOYG ) has made the most dramatic appraisal of the global supply shortage thus far, predicting a 60-to-100-million-ton shortfall in 2008. Meanwhile, Arch Coal (NYSE: ACI ) CEO Steve Leer recently reiterated his call for a 25-to-35-million-ton deficit in 2008, while adding that the number could double to 70 million tons by the end of 2009. Citing the added pressures of power shortages in South Africa and transportation bottlenecks in Australia, Leer foresees strong market conditions for at least two or three years.
Offering a context for the coal phenomenon, Leer commented: "The world has never seen 2 billion people go through an industrial revolution, and we're witnessing it right now. It is changing everything...It is certainly changing basic commodity demands and flows."
On Monday, an industry analyst raised predictions for coal prices through 2010, stating that demand will far outstrip supply until at least that time frame. The statement cited rising shipping costs and the potential for a global economic slowdown as potential downside risks to the sector's performance. This Fool sees rising prices for dry bulk shipping supporting coal prices, however, as coal importers are limited by a paltry set of affordable alternatives.
I'm hopeful that Fools heeded previous calls to climb aboard the coal train. Still, despite the very real indications for a long and fruitful ride, I continue to urge careful entry into such a hot sector.