The following is daily commentary for the Week of Feb. 28 2022. You can scroll down to see portfolio positioning throughout the week along with various performance metrics. This post gets updated every morning prior to market opening so be sure to check back for daily updates.
Monday 2/28/2022
It’s tough to chase the strength in seaborne thermal coal markets but I’m becoming more convinced we should be positioned heavily for higher prices, and for much longer than consensus is considering.
Here’s a chart of API2:
Front month prices may be ridiculously high, but the forward curve all the way out through 2026, at $117/mt, is priced above the former cycle high from 2018, which was $103/mt. The curve suggests structurally higher prices for the foreseeable future, and this is wildly bullish for coal producers with exposure to export markets. For API2, Consol and other exports in the Atlantic basin come to mind including those in South Africa and Columbia: Thungela, Glencore and Exxaro.
Newcastle prices look even better:
Obviously, Whitehaven and New Hope, among others should be able to take advantage. I recently added to my WHC position, and I’m considering adding quite a bit more. For TGA and WHC, once their shareholder return policies begin to kick-in, institutional investors will take notice and their share prices should appreciate materially from today’s levels.
For those playing the long game, Consol should be a strong consideration at the moment. Once their contract book rolls over into 2023, they will be minting money at today’s prevailing coal prices. This year won’t be too bad either, but 2023 will seriously knock it out of the park. CEIX is approximately 20% from the recent highs of Oct. 2021, and I don’t see why it will not reach those levels in the near future. I’m waiting and watching CEIX for an appropriate entry to play it with call options, using the $36 level as a target. Between now and sometime in 2023 CEIX has a good chance of tagging it’s all time highs around $48, a 56% advance from here. See below:
There’s a lot of uncertainty in the world right now. But it’s made me more certain that energy and resource scarcity will be a theme we’re living with throughout this decade.
Monday’s trading activity:
Tuesday 3/1/2022
Equities sold off on Monday, suggesting the recent bounce was simply another counter trend bear market rally. I see either of the following two scenarios going forward this week:
Broad indexes will trade mostly range bound frustrating everyone, and our time would’ve been better spent outside ignoring markets; or,
Broad indexes retest the lows in some form or fashion. This could be another flush lower that get’s bought, creating a double bottom (probably with a higher low), or something similar.
The probabilities therefore suggest it should pay to lean short throughout the week, meanwhile accepting the fact that it may go nowhere. I’m in the camp that views the rip-your-face-off-rally as a low probability, therefore the risk/reward also suggests leaning on short exposure.
We’ve been in a sweet spot where being long energy and resources pays, while also being short momentum tech pays. I’m not sure how long this will last but it’s allowed us to create a fair amount of alpha without the inherent directional risk. I’m sure we’ll be able to spot when this theme quits working because we’ll start to loose to money. In the meantime we’ll try to capitalize as much as possible.
Tuesday’s trading activity:
Wednesday 3/2/2022
Everything energy and resource related seems to be surging higher at the moment. I regretfully misread the met coal equities this week and instead of remaining long I began to trim my positions. As a result I missed Wednesdays large rally in ARCH and HCC despite my bullish stance on both names. Sometimes having a shorter time preference can really bite you in the ass, and my ego definitely feels the bruise which is left as a result.
I’m still leaning into thermal names quite aggressively and I remain more comfortable in that sandbox. Met producers have rallied quite a bit and it’s tough to chase them higher here. However, my mantra has always been to chase positive fundamentals higher and met fundamentals continue to improve. It can sometimes be tough to mentally overcome a short term trading mistake, which often leads to hesitancy. I probably need to simply buy some ARCH and HCC calls asap and put the mistake behind me. There remains positive catalysts for met coal on the horizon, and it would be a shame if I missed out on the entire theme.
As a reminder, the main positive catalyst is China’s seasonal steel production ramp-up which should be taking place now. I’m anticipating Chinese coking coal buyers to bid the price of coal up in order to pull supply away from other regions. China CFR prices have already begun moving up this morning, and iron ore prices are also breaking higher which is a good confirming signal. If the Chinese enter the market in a big way they could cause severe supply shortages to re-emerge and coking coal prices could shoot higher than anyone is anticipating.
Wednesday’s trading activity:
Thursday 3/3/2022
I’m looking for a broad market rout in the coming days, and as early as Friday. This could coincide with a pullback in energy and resources equities. This is due anyway since a lot of tourists have become interested lately. I can easily see the weak hands in energy and resources getting quickly routed by a pullback before this theme rallies higher, and a lot higher.
If you’re already involved - do nothing. If you’re waiting to put new money to work - the time is near for a potential pullback. If we don’t get the pullback I am probably going to chase it higher. However, in the very short term I see being short non-profitable tech and Chinese-tech a better risk/reward compared to energy & resources longs. I’m therefore positioned for tech puke lower. I plan to take profits from the puke and reallocate into energy and resources - so I’m hoping the pullback is coincidental.
We’ll see how it goes, best of luck out there.
Thursday’s trading activity:
Friday 3/4/2022
Commentary coming Monday morning before the bell.
Friday’s trading activity:
Please let me know if you have any questions or comments by hitting the comment button below. And a reminder for those who want to follow my trades on in real time, you can always upgrade to the Founding Member classification of this Substack to get access to TheCoalTrader private Twitter feed.
Monday 2/28/2022
Tuesday 3/1/2022
Wednesday 3/2/2022
Thursday 3/3/2022
Friday 3/4/2022
Please let me know if you have any questions with regards to strategy and positioning, or anything coal related.
Nothing in this Site constitutes professional and/or financial advice, nor does any information on this Site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. The author of this Site is not a fiduciary by virtue of any person's use of or access to this Site or it’s Content.
What do you see in impact of all those sanctions on coal and gas?
I am not asking about the Russian producers, they will just move their product east instead of west
Spot market is above insane and just wondering if there is any incentive for coal producers like BTU or woke coal producers like ARCH to increase production or just take the extra profit and slowly grow fat in their expenses?
Also, as a hedge and the ultimate long term, falling knife and risk thrillseaker, loaded up on some gazprom stock before it was frozen. Any insight on real difficulties for them except that they now will be scooping up the shares of disinvesting partners for a penny?
First, thank you for your knowledge and making this service available. I’ve made a lot of fiat and it’s only the beginning for the whole commodity space.
The challenge I face is being trained in fundamental analysis, I struggle with deciding when to go with fundamentals or ride the tide of the narrative and the mob (see BTU).
I keep reminding myself to diversify and take money off the table. As Trader Ferg said one time, ‘when you have a big win, walk away and celebrate the victory.’ That has really helped me in keeping my sanity in these insane times.