Currently, two-thirds of the world’s coal is used to generate electricity. The rest goes into steel and concrete production.

The US Department of Energy says China and India will account for 70% of the increase in world coal consumption over the next two decades.

And consider China’s plans for the next five years… they’re planning to build the equivalent of ten New York Cities, said a Canadian chief executive and financier at the mining conference I attended yesterday!

This will need unimaginable amounts of coal for steel production, concrete production and energy generation.

China used to be the largest coal producer in the world, but it is now a net importer. As the communist Republic continues to develop, it will have to import more and more coal. There are no realistic alternatives.

And that will continue to boost the coal price. It’s great news for one brilliant investment. More on that in a moment.

Two more UK coal power stations planned

Most governments have accepted that coal will have to play a big part in their future energy strategy.

Why? Because most of them have been useless in sorting their energy strategy out. This is particularly true in the UK.

France puts us to shame. The country gets 79% of its electricity from nuclear power; which is way ahead of anyone else in the nuclear stakes.

We still do not know for sure if any new nuclear power stations are going to be built – and it takes years to bring one into operation.

However, we do have plans to build our first coal power stations in 20 years. And it’s not just one – but two. And they’re being built by the Germans – even they are ahead of us in the nuclear stakes!

In March 2007, RWE Npower submitted proposals to spend more than £1bn to replace its existing coal-fired station at Tilbury in Essex. The plant would be operational by 2013. E.ON also hopes to replace its plant in Kingsnorth, Kent, by 2012.

Coal will bridge the energy gap as the oil price soars

It’s cheaper and less technologically challenging to build a coal-fired power station than a nuclear facility. This means coal will be attractive in developing countries too.

The American government has also been slow in resurrecting nuclear power as an energy option in the US.

This situation has been repeated all over the world, and I have no doubt it ensures coal’s continued bull-run over the next 10 years.

The US Energy Information Administration forecasts world coal consumption will double between 2003 and 2030. Non-OECD countries account for 81% of this increase.

So, coal is by no means the fuel of yesteryear – it will be around for a long time to come and demand is likely to soar.

If you haven’t got exposure to a coal producer in your portfolio, you need to think again

Here at Smart Commodities UK we’ve been invested in this trend since last October and it’s already showing a tidy gain.

But I believe there are much more gains to come.

You see, this company uses royalty streams (which are now rising) to invest in early-stage mining companies with a view to generating more royalty payments.

The board has proved this strategy works. Between 2002 and 2006 the group achieved a compound annual growth rate on its investments of 76% – this was before the recent surge in coal prices and the increased royalty payment news.

And just this morning they reported that from 1st July 2008 a two-tier coal royalty rate would now apply to its assets in Queensland.

The current 7% royalty rate will apply to the value of coal produced by a mine sold below $100 per tonne and a higher 10% rate will apply to the value of coal sold above $100 per tonne.

In April 2008, coking coal prices rose sharply to between US$250 and US$300 per tonne… so it looks likely that all payments from now on will be made at the 10% rate instead of 7%.

It goes some way to explain why analysts at brokerage firm Numis have upped its price target of this share by 12.5%.

The company also pays a dividend. A payment of 4.35p per share was approved in April. This fact makes the company virtually unique on the London Stock Exchange.

You get exposure to early-stage mining opportunities, paid for by rising coal royalty payments AND a dividend stream as well.

I’m encouraging my readers to buy this stock immediately.

Find out how to access these details here.

Regards,

Garry White
Editor Smart Commodities UK

Note: Past performance and forecasts are not a reliable indicator of future results.

Source: Coal Price Guaranteed to Soar

But it’s not just the EIA that are moving up estimates, traditional under-forecasting oil analysts are doing the same too.

In Reuters’ monthly survey of oil-price analysts at the end of March, the average forecast of the 29 analysts surveyed was $90.55, up from $83.77 in February. Five of the analysts in the survey forecast average WTI prices at above $100 a barrel.

So, I reckon consensus numbers still have room to move higher, boosting the oil sector after the upcoming quarterly reporting season. (Note: Our oil play Royal Dutch Shell (LSE: RDSB) posts its quarterly numbers on 29 April).

WTI futures averaged $72.32 per barrel in 2007, with the 2008 estimate at $101. The EIA also issued a 2009 forecast of $92.50.

Continues below…

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Forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

The oil price moved ahead on the news yesterday, but eased this morning to stand at $108.22. This move means that the US gasoline market is also expected to tighten as refiners continue to run refineries at low capacity. The crack spread this morning for WTI Cushing fell $0.621 to $8.992. This is bullish for the oil price because refiners won’t operate at full capacity if they cannot make a decent profit from their operations.

The EIA also said that the projected higher costs for crude oil will contribute to higher petroleum product prices (erm, well done for that analysis guys).

Gasoline prices were projected to average $3.36 per gallon in 2008, up 55 cents from last year. Diesel prices are projected to show even larger increases in 2008, averaging $3.62 per gallon, or 74 cents above the 2007 average price. The government department is also predicting spikes to $4 a gallon in the peak summer driving season.

This report makes me even more convinced that oil is likely to stay above $100 a barrel for the majority of the year. In fact, I’m starting to believe that the Reuters’ consensus view, which has significantly lagged real oil prices, will breach the $100 level in the next few months DESPITE the credit contraction and DESPITE predictions for gasoline consumption to fall by 85,000 barrels per day in the peak driving season.

It’s not just me that has this view, the market agrees with me.

Despite the EIA saying demand will fall, the futures strip price, which is the average price of the next 12-months futures contracts, has edged only slightly lower. (Remember: I said yesterday that this is the data used by companies such as Royal Dutch Shell to do their own financial planning.)

Yesterday the strip price stood at $105.90. News of falling demand has reduced this to $105.19.

The Reuters’ consensus for 2008 stands at $90.55, which lags the futures strip price by 16.9%. I prefer the futures strip price and I am therefore convinced that the oil price will stay above $100 for most of the year. Indeed, I said last month that I thought oil was on the way to $120 a barrel. That is still my view.

One other supporting factor from the report was the fact that the decline in US gasoline demand started during the second half of 2007 and has accelerated so far this year. Over this time period, the oil price has soared.

Regards,

Garry White

PS: should you know anyone else that you believe will find my musing of interest please forward this link so that they can sign up for the service.

PPS: I also write a newsletter each month called Smart Commodities UK which expands on the views expressed in Garry Writes and makes specific recommendations in the resource, infrastructure and biotech sectors. To discover more click here.