Coal will be a bigger story in coming periods

Resources Resume Profit Trend
Make no mistake, in two years from now Coal will be a bigger story than Crude
Oil. Those who get in early will make money by the tonnes.

-There are three wild bets Electrosteel Castings (Iron Ore, Thermal And Coking
Coal), Prakash Industries (Coal, Power and Steel) and Jindal Photo Films (Power
and Coal).

-And three solid bets-Revathi, Atlas Copco and Ingersoll Rand (Drilling
Equipment and Compressors)

Want the story from yesterday’s market trading? Have a look at the 52-week
highs in the sidebar to your right. BHP, Rio, Coal and Allied, Woodside. The
biggest iron, coal and oil stocks on the Australian share market just made new
highs.

This resource dominance shows up in graph form too. Check it out. United they
fall…divided they stand.


Financials fell the most when the market crashes…and has gained the least when
it recovers. Mining energy stocks lose the least and gain the most. They’ve had
a strong few months since February.

That graph isn’t a crystal ball, though. It’s a rear-view mirror.

But it still illustrates our point. The resource markets are fundamentally
better than financial stocks. Why should you invest your money in anything less
than the best option? We couldn’t come up with any compelling reasons, off the
top of our head.

Diversification often comes up here.

The whole point of diversification is to reduce unneeded variation in your
returns. It depends, necessarily, on picking two assets that don’t move
perfectly in sync. If you bet on two horses in a race, you can reduce some of
the variation in your winnings. If one horse is good on wet tracks, and the
other good on dry…you’ll suffer less in a freak rainstorm by betting on both.

If resource stocks go up faster than the rest of the market, and down slower
than the rest of the market...well, it’s a win-win. Diversification makes little
sense. If, for example, only one horse is facing the right direction before the
race…you wouldn’t bet on the others for the sake of diversification. There’s a
difference between averaging down risk and giving your money away.

But here’s the question…will the mining trend keep up?

Resource stocks are mostly about growth in demand. That’s where their share
price growth comes from. Earnings growth comes later…if you wait around for a
sign of earnings growth you’ll miss the train.

So to answer the question, you have to search for reasons why profits from
strong hard asset demand could continue. Here are three to get you started.

Government Throws $20b at Coal Miners

It’s hard to satisfy demand when dozens of your coal shipments are waiting
around in port. For Kevin Rudd, coal means GDP growth. So, yesterday’s budget
included a $20 billion handout to the Building Australia Fund. Build,
Australia. Build as fast as you can.

Wu Chenghou, executive director of the Coal Sale and Transportation
Association of China estimates that China consumed 2.5 billion tonnes of coal
last year. By his reckoning, that should increase by 20% to 3 billion tonnes in
the next three years. Boom.

On that note…there’s probably an investment idea there. Who’s going to develop
infrastructure in the coal industry? Who’s going to drill and fit out all those
developing coal mines? From what we’ve seen, there aren’t that many companies
out there with the expertise. But the ones that have it could be good earnings
prospects.

Rohit
Nothing in this article is, or should be construed as, investment advice.