Although it may not be the most fashionable of assets, analysts are warming to coal.
Increasing worries about climate change and the desire for major institutions to be seen as responsible have prompted insurance giants such as Axa and ING to sell out of fossil fuel-related businesses.
Even Norway’s massive sovereign wealth fund, built on the back of the country’s oil wealth, has advised it is reducing its exposure to fossil fuels.
But according to analysts, coal investments are not going to go up in smoke just yet. Though the amount of energy being generated from renewables is increasing, and some of the City’s top investors have started ploughing their cash into clean energy, there is still demand for dirty old coal.
Analysts at investment bank Jefferies released a note to investors this month saying that ‘rumours of coal’s death are premature’.
It has raised its target price of seaborne thermal coal, burned for steam to generate electricity, as opposed to coking coal, which is used to create steel and iron, from £68 to £80 per ton for the remainder of 2018. It also lifted its long-term estimate from £49 to £63 per ton.
Christopher LaFemina, an equity analyst at the bank, said the predictions ‘may still be too low’, though they were well above other analysts’ predictions.
So what has been causing coal prices to smoulder once again? After all, oil giant BP said earlier this month that renewables were ‘by far’ the fastest-growing fuel source.
Though it may have become a dirty word in the UK, with the government putting all its energy into funding renewables, coal is still a vital commodity in developing countries where it fuels the economy.
Jason Hollands, managing director at investment manager Tilney, said: ‘In the near-term, the realities of increased demand against the backdrop of the continued global economic expansion are evident, with strong demand from India and South East Asia.
‘India in particular is struggling with supplies, which are essential for both its electricity network and steel production, and Australia looks set to be a key beneficiary of this.’
Australia was the second-largest exporter of thermal coal last year, sending 206m tons, according to Jefferies. Indonesia was the largest, exporting 387m tons.
Ironically, lobbying by anti-fossil fuel activists to prevent new mines being built may have inadvertently helped to support coal prices, Hollands said.
As prices are driven up, London-listed miners – including some of the biggest companies on the FTSE 100 – should benefit. Anglo American and Glencore were two of Jefferies’ top picks for coal miners in Europe. Anglo’s shares have fired up by 152 per cent over the last three years to 1636p, while Glencore’s have climbed by the smaller margin of 36 per cent to 358p.
But while there may be some perks to investing in coal for now, Hollands advised investors to approach the black stuff with caution.
He said: ‘While the near-term dynamics look positive for coal, this is a quite a narrow theme.
‘For the long-term investor, there is no doubt that the shift to cleaner forms of energy is going to continue, with the real debate simply around the timescale.’
Andrew Swan, head of Asian and global emerging market equities at asset management giant Blackrock, noted that though physical commodities were climbing and company earnings were being revised upwards, shares of companies in the energy sector were staying stubbornly stable.
He said: ‘We see reluctance of share prices to move up as mirroring the belief that the price surge in oil, copper, steel and coal may be short-lived.’