Investment U Report

Tips for Investing in the New "King Coal"

When it comes to commodity investment, it's critical that you know your history. Poll any American about the origins of coal, and you'll likely get the answer that it was rst mined here. Perhaps they were paying as much attentionin history class as I was. More likely schools never touched this subject in the rst place. But it's importantto understand the production origins of any commodity, as this knowledge can provide you with a better understandingof where and how to invest. America was a little late to the coal party. Production actually started in Europe, more than 200 years ago. The Industrial Revolution began in Great Britain in the eighteenthcentury. Its spread to other parts of Europe - eventually to North America - and was largely due to a new, cheap and readily available fuel: coal. Coal: Fuel for Industrial Revolutions Since 1805 The United Kingdom's western valleys are the heart of the massive South Wales coaleld. It provided the fuel for England's industrial steam engines, railroads and steamships. The longest continuously operatingcoal mine in the world was the Tower Colliery in South Wales. Opened in 1805, it operated for 203 years until it closed in 2008. Coal is found just about everywhere in the world. The graph below, courtesy of the World Coal Association, shows where the largest oil, coal and natural gas reserves are. You can ignore the gures for natural gas, since this graph was produced prior to the developmentof shale gas elds. The biggest coal reserves are in the United States, India, China, Russia, Africa and the Asia/Oceana region.

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In terms of consumption, the picture is a little different. In the graph below, from the Energy InformationAdministration InternationalEnergy Outlook, you can clearly see that since 's 2000, China has been gobblingup coal at a frenetic pace.

By 2030, China alone will be consuming half of all the coal produced in the world. Where's it all going to come from? One nearby country (besides Australia) is shaping up to become a major supplier of coal to China. The Two Types of Coal Coal is generally classied into two types: soft coal and hard coal. Soft or low-rank coal is either lignite or sub-bituminous. It represents about 47 percent of all the world's mined coal. Both are used for power generation, and some sub-bituminousis also used to manufacture cement. Hard coal is either bituminousor anthracite. Today, anthracite represents only about one percent of all coal mined, with bituminousmaking up the rest (52 percent). Bituminous is further divided up into coking coal (used in iron and steelmaking), and thermal or steam coal, used in power generationand other industrial processes. Most of the world's coal trade is in thermal or steam coal. It represents about 70 percent of world coal exports. The top three exporters of coking coal are Australia, the United States and Canada. They're expected to hold those positions through the next several decades. Care to guess the top exporter of thermal coal? I'll give you a hint: It's none of the above. The answer? Indonesia. The country is loaded with thousands of low-cost surface mines. Indonesia's Bumi Resources: The Top Producer of Thermal Coal While Indonesia has been in the coal business for some time, it's jumped to the forefront of the coal scene in a big way in just the last decade. In 2010, Indonesia produced 325 milliontons of thermal coal. Of that, 265 milliontons were for export. Most of it landed in India, China, Japan, South Korea and Taiwan. The country's - and indeed Asia's - biggest thermal coal producer is Bumi Resources (PINK: PBMRY). Bumi is under the watchful eyes of the Bakries, one of the most politically connected families in the country.

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Bumi's rst quarter revenue was up 21 percent to $1.23 billion. Prots grew by 16.5 percent to $113 million. Higher coal prices as a result of strong demand from all of its customers made up for lower production due to heavy rainfall in the vicinity of its main mining operations. For 2011, Bumi expects its output to rise by 10 percent, and analysts are forecasting 2011 net prots of $498 million. Investors wanting additionalexposure to a strong Asian coal player might want to consider adding a few shares of Bumi Resources to their portfolio. China's demand isn't expected to decline any time soon. Good investing, Investment U Research Any investment contains risk. Please see our disclaimer.

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