The above chart (click to enlarge) depicts a one-year analysis of near-month Central Appalachian Coal Futures Contract Prices (NYMEX: QL), the Market Vectors Coal Company ETF (KOL), the U.S. Oil Fund (USO), the U.S. Natural Gas Fund (UNG), and the S&P 500 SPDR ETF (SPY). QL fared the best with a minor decline of 0.3%, compared to major losses of 61.4% for KOL, 58% for USO, 49.1% for UNG, and 34.7% for SPY. The chart was constructed using the daily closing prices for each component.
The prices for coal futures from other areas of the world were excluded in the chart analysis to avoid congestion from too many data points and since the correlation is high (around 95%) to QL. The table below illustrates the high correlation of global coal prices and low correlation of about 64% for Central Appalachian coal prices and KOL over the past year.
KOL illustrates a much higher correlation to the overall market (SPY) of about 92% versus a low correlation for the price of coal to SPY at just 45%. USO and UNG also demonstrate high correlations to SPY of 86% and 83%, respectively. Below are the details for the futures contracts analyzed in the correlation matrix as a proxy for the global price of coal, representing the major global exporters of coal.
1.) United States: NYMEX Central Appalachian Coal Futures (QL)
2.) Europe: Intercontinental Exchange (ICE) Futures Rotterdam (ATW)
3.) South Africa: ICE Futures Richards Bay (AFR)
USO and UNG demonstrated correlation of about 90% while QL was much more correlated to USO (78%) as compared to UNG (56%). However, KOL demonstrated a high correlation of over 92% each for UNG, USO, and SPY. The following factors warrant development of a new exchange-traded commodity product to track either the global or U.S. price (or both) of coal:
1.) the low correlation of coal prices to the overall market and other energy commodities
2.) the importance of coal in the global energy markets and power generation
3.) the lack of a exchange-traded product for coal prices
4.) the low correlation of the coal stock ETF (KOL) to coal prices
Such a CoalFund could be developed as a new investment vehicle to provide investors with exposure to the performance of near-month futures contracts for the global price of coal from the major coal producing and exporting regions in the world, the United States, or both. In addition the U.S., Europe, and South African coal futures contracts outlined above; a new product recently began trading as proxy for Australian coal futures on the Intercontinental Exchange (ICE) – the ICE Futures globalCOAL Newcastle Coal