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The Diamond in the Rough

By Bryan Perry

In business, timing can be everything -- and in an increasingly complex global economy it's sometimes the hardest thing to get right.

Among the biggest winners on global stock markets have been the coal companies that benefited from a massive leap in contract prices.

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There are two grades of coal: thermal coal and metallurgical grade coal.

Thermal is your everyday power-plant-firing coal. Met coal is used in the production of steel because it has a high thermal output, is low in sulfur and can be processed into nearly pure carbon coke -- something necessary for steel refining.

This year, the worldwide demand for steel is growing at a rate that's almost 7% higher than in 2007, and represents an increase of more than 20% over 2005. So, without a doubt, the demand is there and growing.

You've no doubt heard a lot of talk about the building and industry growth in China and India, and the Street predicts that the demand growth for met coal, because of these and other countries' needs, will only grow.

Estimates of the price for met coal also show nothing but growth. The price of this coal is up approximately $90 a ton from a year ago to around $250. And if you believe industry forecasts, we will be able to add another $100 to the price before long.

Bullish analysts claim that the supply/demand outlook isn't good, even though there are ever-higher prices because of the problem of finding new supply sources to meet the current shortfall. In fact, there will continue to be deficits, and, any way you slice it, there is little chance met coal prices will pull back from here.

Securing the Source

There are other developments that confirm the bullish fundamentals for met coal.

Macarthur Coal is an Australia-based coal mining company and major met coal producer with operations in Queensland's Bowen Basin.

The world's largest steel maker, Arcelor, bought a 15% stake in Macarthur Coal for $604 million. And South Korea's Posco (PKX), another major steelmaker, holds a 10% stake in Macarthur.

If you think those two companies represent the whole picture, take a moment to factor in the fact that China's state-owned Citic Group has a chunk of Macarthur, too.

Talk about trying to secure the source!