The importance of indicators for coal industry investors



What are indicators?

Stock prices are driven by various parameters. Some movements are driven by the economy. Other movements are explained by the relevant industry scenario. Some are driven by factors that are specific to the company. And yet other movements are either unexplained or can be explained by technical and behavioral factors.

Market Realist’s US Equity and ETFs page deals with macroeconomic factors. At times, we also cover factors that are specific to a given company, such as earnings and major developments pertinent to investment analysis. To understand industry dynamics, we produce industry primers, such as this overview of the coal industry, and other industry pieces such as this regional economics analysis of coal.

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As the name suggests, indicators show what could happen to an industry in the short to medium term—that is, within the next six months. Short-term movements in coal prices are affected by various factors such as the weather and natural gas prices. In this sense, they indicate short-term movements in the price of coal.

Why are we covering them?

Market Realist believes in long-term investing. In that case, why should short-term movements matter at all? Well, we believe that even for a long-term investor, entry and exit timing is important. When an investor wants to invest in or sell stocks (SPY) from a particular industry like coal (KOL), indicators can provide valuable clues about whether to invest or sell right then, or wait a few more days.

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Thermal coal industry indicators

Currently, the coal industry is experiencing heightened volatility. As a result, it makes even more sense for us to cover the short-term indicators. We shouldn’t just focus on the industry’s long-term aspects.

Over the long term, the industry may revert back to normal because the weak and high-cost producers will go out of business if low prices persist. The supply will shorten due to more mine closures. This will lead to an increase in prices because fewer tons of coal are available in the market.

In the short run, however, there’s too much volatility. There are speculations about Walter Energy’s (WLT) bankruptcy. There are also speculations about Peabody Energy’s (BTU) acquisition by BHP Billiton (BHP). As a result, it’s important to watch short-term indicators—even if you’re a long-term investor betting on the coal industry’s revival.


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