The Incident: Underground Coal Gas Ignition
This week, a fire caused by an underground coal gas ignition erupted at Australia's Grosvenor Steelmaking Coal Mine. This unfortunate incident prompted an immediate evacuation and subsequent shutdown of the mine. The event has disrupted the coal supply chain and resulted in a notable spike in coal stock prices.
Market Reaction: Coal Stocks Soar
As a direct consequence of the supply disruption, coal stock prices have soared significantly. The surge has driven coal stocks such as Whitehaven Coal (WHC) and Yancoal (YAL) into what the Relative Strength Index (RSI) indicates as overbought territory. For investors who are not familiar with RSI, it is the indicator at the bottom of the charts below that provide a general indication on when it is a good time to buy or sell.
Global Demand for Coal Remains Strong
While the mainstream media does not cover this enough, it's imperative to note that global demand for coal remains robust. Both China and India are aggressively building new coal plants to meet their growing electricity needs. This means the demand for coal will continue to be strong, especially from these developing nations.
Tactical Trade: Shifting Investments
In response to the sudden spike, I decided to capitalize on this short-term trading opportunity. I've sold my coal stocks to realize the profits and reallocated the capital into oversold uranium stocks on the ASX, specifically Lotus Resources (LOT) and Paladin (PDN). I like that these two stocks seems to have found support at the 200 day moving average. This tactical move aims to leverage the potential upside of these undervalued equities that seem to have found a bottom.
Long-Term Outlook: Still Bullish on Coal
This shift is a short-term strategy — it doesn't signify I have a bearish outlook on coal. Coal producers are trading at significantly low multiples, and I foresee no substantive decline in global coal use in the coming years. This trade is simply a strategic maneuver to capture some immediate portfolio gains and redeploy capital efficiently.
Future Moves: Monitoring Market Conditions
My plan is to reinvest in coal stocks once they return to fair or oversold conditions. I'll send out another note when I decide to shift the capital back from these positions into coal.