The Peak Coal Portfolio

While I usually only make investments that I expect to pay off in 5-10 years time, and even the earliest predicted peak for world coal production is still 18 years off, the precise date of the peak is not at all important for the purposes of investing. What is important is when we will see unexpected price rises as demand adjusts to constrained supply. As an example, the first effects of peak oil are not happening today; instead they happened in the early 70’s, when United States production peaked, and Texas could no longer act as the swing producer of oil, leading to a shift of production in the Middle East. Because of the new investment required, that shift took a number of years, during which time oil stayed at historically high levels, until new production caught up with demand.

Could something similar happen with coal?
If any country is likely to be a driving force for world demand, sending prices up for everyone, that country is likely to be China, which is by far the largest producer of coal, but has only half the reserves of the US (according to the EWG report.) How many times have we heard that the US is the “Saudi Arabia of Coal”? If it is, the China is the “United States of Coal.” I think a price spike in coal available for worldwide trade is the most likely investable event for peak coal in the near future.

Here are some effects I would expect from such a price spike.
Coal prices in current coal importers would skyrocket.
Coal prices in areas with easy access to ports would also rise dramatically.
Transportation links such as rail from coal producing regions to ports, ports, and bulk shipping would also benefit.
The price of electricity in regions relying on coal fired power (other than mine-mouth plants) would increase several cents per kWh.

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