Bangladesh: Billions for Coal

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You may not have heard the biggest news out of Bangladesh lately; in fact, you've likely not heard any news out of Bangladesh lately.  The small southeastern Asian nation rarely makes the headlines, with the exception of the occasional article about their poor labor standards and difficulties in pulling an economy out of a top hat.  While it's too soon to say that's about to change for the impoverished nation, their government has taken a massive step forward in order to secure energy for the nation by building a series of coal power plants.  With a price tag of nearly five billion dollars for the project, the plants would not only give a boost to the nation's infrastructure but also provide a fantastic source of demand for coal, which has had so little good news to look forward to.

Breaking Away

There's a number of nations across the world that started out from day one with two strikes against them.  Bangladesh emerged out of the womb without nearly the type of advantages that you'd want as a citizen of the nation.  Spinning off from India and Pakistan in a series of not one but four brutal wars, Bangladesh entered the mid-20th century without much in the way of an economy or an educated population; their literacy rate today stands at just 58%, and only 53% for women.  The country's leadership has had to make a series of tough choices in order to provide some semblance of national structure after a series of uprisings and political takeovers, with corruption pervading throughout each level of the state.  Only in the past decade have anti-establishment parties won seats in Parliament, allowing relationships with neighboring nations in the hopes of advancing Bangladeshi interests rather than the interests of the rulers.  In 2014, the government announced an ambitious project to build a series of hydroelectric dams on the Padma River in the hopes of providing electricity to a nation where only two in five persons have regular power.  That plan failed for a variety of reasons, most notably because a series of Indian civil engineering projects beat Bangladesh to the punch and limited water outflow, with the result that the improverished nation had to look elsewhere for help getting their project off the ground.

Enter the Competition

Southeastern Asia throughout 2015 has managed to shake off the economic woes due to China's slowing economy with a rather profound vitality.  Some of the most promising economies growing today lie in close proximity to Bangladesh, including India and Vietnam.  Indeed, the issue of coal-fired power plants has demonstrated how Bangladesh chose to walk away from the influence of China rather than succumb to it.  The original plan for the infrastructure came on the heels of a Chinese policy enacted by President Xi Jingping under the "One Belt One Road" campaign, which attempts to link the economic might of the Chinese through southeastern Asia in order to develop extensive trade networks through transportation projects.  Yet Bangladesh decided that rather than choose the Chinese offer for help, they would turn to a Japanese plan in order to finance and construct the coal-fired plants.  Though there's nearly as many questions about Japanese stability compared to Chinese stability, with the island nation's GDP shrinking by .3% in the second quarter of 2015, Bangladesh opted for the ultra-low interest rates offered by Sumimoto Corporation, which would give the government three full decades to pay off the balance at just a .1% interest rate.  Even so, the Bangladeshi Planning Commission senior secretary Shamsul Alam announced that the Bangladeshi authorities intended to maintain close ties to Beijing to continue financing infrastructure, with "no plan to sideline China."  One major reason why China remains in the picture is coal itself: with 2.5 billion tons produced per year, China's output is as much as the next four nations combined.

Whole Coal

Bangladesh's move comes at an important time for coal commodities.  Coal had a remarkable stability through the month of August, with almost no net gains or losses whatsoever, indicating a stability that could mapped as a 0 z-score.  While various economists, including Goldman Sachs, have called for a sell on coal in order to get out of the game, there's ample debate about whether or not the price has finally hit rock bottom.  The International Energy Agency predicts the price of coal will rise to $100 per ton by just 2020, increasing by over 50% compared to today's trading prices.  The demand for coal won't come from industrialized nations, as the US and EU look towards renewable energy rather than construct new coal-fired plants.  Instead, developing nations like Bangladesh and Indonesia will provide the bulk of demand needed to turn the energy commodity around.  That makes coal a good sleeper pick in an energy market where there's too few promising investment paths.  What's more, the lower price of coal offers surety that demand will spike in the future, since the construction of Bangladeshi plants and the purchase of coal depends on the current low prices; with more and more energy projects built upon inexpensive coal comes a glut of demand that will see prices rise.

  • The Takeaway: cheap coal serves the interest of both developing nations and developing portfolios.  Buying coal at today's prices gives excellent value over the long run (12 months or more).  It's not recommended that investors pick coal for quick returns but rather as a long-term growth mechanism or a hedge against ailing gas and oil prices.  Since it's difficult to predict the short-term, furthermore, investors shouldn't look to short-sell coal futures because a new swing in demand could like the Bangladeshi project could unexpectedly drive prices upwards.
  • Should you consider coal mining stocks as well as commodities?  Recent history suggests as much.  Peabody Energy is currently trading near 52-week lows but their value and movement grew considerably during a month of August that was disastrous for the Dow as well as the S+P 500.

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