If I had to point to a segment of the natural resources sector with the lowest investor sentiment right now, it might well be coal.
Coal is thought of as antiquated and brutish, a relic that will soon be excised from the ranks of global energy markets.
It's easy to see why. On the surface, there's a lot to dislike about coal. The biggest strike against the industry is environmental. This month, the news has been rife with stories about record air pollution nearly shutting down a number of cities in northern China.
Whether it's for these environmental reasons -- or simply a matter of economics -- there's a sense that the world is turning away from coal.Since 2009, China has been the driving force in global coal markets. Coal imports in that country exploded during the past five years, jumping to a peak of 35 million metric tons per month in December 2012. That's a 1,500 percent increase from 2008 levels. But growth in China's coal imports has stalled. Although imports are holding at a relatively high level, the days of explosive increases in import demand appear to have passed. The sense then is that we may be settling into a new normal for the coal market. Thermal prices peaked at $140 per metric ton back in 2008 when Chinese import demand began to surge. But today thermal coal has fallen back to half that level -- currently trading around $60 per metric ton on average globally.
But reports I'm reading from several parts of the world back up my suspicion that positive things are afoot in the coal sector. Changes in technology and some ground-moving shifts in global consumption patterns could spell better days ahead for these businesses.
I recently explained these shifts in the November issue of my Scarcity & Real Wealth newsletter, but suffice it to say, there's one major reason I think coal stocks could break out of their decade-low trading ranges -- one that could lead to a repeat of the kind of price spikes we saw in 2008.
Simply put, it's because India's coal industry is imploding.
Years of corruption and a bureaucracy as thick as pea soup have hobbled production of the country's mineral riches -- natural gas, iron ore and especially thermal coal.
The situation is becoming dire. More than 20 percent of India's 98 coal-fired power plants are running at critical levels of coal inventory -- meaning less than seven days' worth of supply. Nearly 15 percent are at "super critical" levels, down to less than four days of coal.
The coal shortage has a real potential to cripple India's power sector -- a fear that has prompted the country to import coal at a high and accelerating rate.
Hard numbers on India's imports are tough to find, but early indications are that India's coal import growth is in fact so explosive that coal market insiders see the nation passing China as the world's No. 1 coal consumer within the next three to five years.
For India to surpass China then, its thermal coal imports needs to surge by at least 65 percent from the previous fiscal year's levels of 90 million metric tons.
That's a huge amount of new demand coming into the worldwide market. The last time we got this kind of new import growth globally was in 2008, when China began ramping up its imports. That spurt coincided with a run in thermal coal prices to $140 per metric ton -- double current levels.
I recently made an appearance on Business News Network's "The Close" to talk about India's coal imports. You can see the interview by clicking here. But to put it simply, if Indian import demand unfolds the way it appears it will -- we could see an unexpected boost to revenues and profits of several key coal producers.
Note: I've also finished putting together a report on another group of "hated" stocks right now that I think could break out: gold miners. It all has to do with a little-known "quirk" in the way shares of miners are treated in down years that allows savvy investors to buy shares at a significant discount. The last time this set-up happened, investors could have made gains of 44 percent ... 53 percent ... even 139 percent. To learn more about this opportunity, click here.