The New Coal ETF: Not So Fast

by: Thomas Smicklas posted on: January 16, 2008 | about stocks: KMP / KOL    

I understand the excitement created when a new ETF hits the market, especially when it is a parsed and novel pure play on a commodity that is in widespread use. Let me propose a contrarian view of the Market Vectors Coal ETF (KOL).

The opinion of a contrarian that I subscribe to is probably different than the usual definition, "the majority opinion is wrong". The original book on the contrarian approach was the Theory of Contrary Thinking (1954) by Humphrey Neill. Neill stated throughout his book that contrary thinking is only considering other sides of an issue - to look at all sides of the question. For some reason, this book encouraged a wave of investment gurus to deduce a train of thought that they applied as contrary thinking, but cannot be factually supported - the simple-minded idea that the majority opinion is wrong.

Several positive articles on KOL have appeared in recent days. They deserve respect and the attention of astute investors. My contrary approach is commenting upon other sides of the coal issue.

Coal is a hideous polluter. According to the Union of Concerned Scientists, burning coal is the leading cause of smog, acid rain, global warming and air toxins. In an average year, a coal plant generates 3,700,000 tons of carbon dioxide, which is politically toxic to the current global warming-induced world mindset. And we know this mindset is pervasive. Let's not bother with the 10,000 tons of sulfur dioxide, 500 tons of small airborne particles, 10,200 tons of nitrogen oxide, 720 tons of carbon monoxide, 220 tons of hydrocarbons, 175 pounds of mercury and 114 ponds of lead.

In the Midwest, home inspections are now including arsenic soil samples on house lots. Why? Our government has set new,more stringent arsenic standards. And homes fail this test in coal burning power plant regions. The 225 pounds of arsenic produced by a typical coal-fired plant is supposed to cause cancer in one out of one hundred people who drink water contaminated by 50 parts per billion. Let the litigation begin.

There is plenty of coal in the ground. Hundreds of years worth. What is the urgency to buy now? Perhaps one strategy is to guess what coal or Big Energy companies will be the winners in a coal global consolidation period, if there is one. An ETF may not capture the profits of this theme.

If companies consolidate and size allows more investment in environmental procedures,it stands to reason that there must be in place technology to allow coal to burn cleaner. Thus, more coal will be mined for use and the companies will win the politically correct end game of cleaner coal, which will bring joy to most ardent global warming zealot.

I have located one company that has a leg up to make world-wide coal companies politically viable. And I think this company and others to follow may deliver more shareholder value than coal itself.

It appears that the number one company worldwide in the carbon product toxin recapture field is Kinder Morgan Energy Partners (KMP). KMP is the only Master Limited Partnership that has a large amount of carbon dioxide recapture experience, which is highly specialized and not easily replicated.

KMP is a likely partner of choice for clean burn CCS projects and thus will capture the profits for this necessary procedure. KMP is superbly well managed,and is best of breed in several endeavors of energy transmission, diffusion and alternative energy applications based upon years of experience. Dividends are tax advantaged.

Contrary thinking according to Neill begs that questions be asked from several directions to ascertain the validity of a proposal. This article scratched the surface. I do not think KOL is a stinker. But I would advise looking at the commodity of coal as Mr. Neill penned long ago.

DISCLOSURE: The author has no position in KOL or KMP.

This article has 7 comments! Add yours below...

Thomas Smicklas

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This article has 7 comments:

  •  
    calvino
    Jan 16 03:48 AM
    Thanks for the Neill insight - it would really make my year if anyone else knew what the heck it really means. Might take a look at a small Canadian carbon storage, HTC for a startup position in carbon capture. Good article!
  •  
    PAD
    Jan 16 08:57 AM
    Actually Kinder Morgan simply transports CO2 and has absolutely zero experience in capturing it from power plants. KMP isn't even in the power business anymore. Not sure how this qualifies as having a "large amount of carbon dioxide recapture experience".

    They do, however, have an edge in going "green" as they supply natural gas to all the new ethanol plants going up all over the midwest. These plants require about 100,000 BTUs of natural gas to produce 2.8 gallons of ethanol and drive higher demand for KMPs natural gas network.

    Carbon capture will eventually come from the GEs, the Bechtels and the Shaw Groups of the world but good luck trying to guess the timing.

    Also, the Rockies Express should drive higher KMP dividends/distribution... for years to come.
  •  
    TAS
    Jan 16 09:26 AM
    My Website
    Kinder Morgan's parent has the technology and has applied it via KMP. Credit Suisse First Boston had a spot on analysis of this two months ago, as I recall. I agree that other companies, such as the ones mentioned in your letter, will "capture" benefits from toxic recapture. I sense we agree that the technology will be a significant way to profit from the appetite for coal as an energy source in the future.
  •  
    Richard
    Schweitzer
    Jan 16 11:04 AM
    Take a look at FTEK, and look at the developing technologies.

    The real issue with use of coal is Need vs Desire.
  •  
    floridadon
    Jan 16 12:39 PM
    With governemnt afraid to tap the vast energy reserves off the coast of Florida where is our energy to come from? When we do not tap natural gas reserves, what do we use? We, use coal. The irony is China is drilling within 47 miles of our coast in waters off Cuba. Energy policy, there is no policy, but to insert our headf in the ground.
  •  
    sniffers
    Jan 16 06:48 PM
    Suggest you don't merely rely on figures from the Union of Concerned Scientists for the emission numbers from coal plants - they are NOT 'hideous polluters'. I'm not a coal stock owner - I work in the copper biz - and I know that all coal plants are different and they don't all emit 10,000 tons of sulfur dioxide annually, nor mercury and lead. It's just not true. The Union of Concerned Scientists is the last place to look for clean, unbiased information, because it is an advocacy group that uses the technical background of its members to twist the facts in ways imperceptible to the untrained millions. Peruse the National Mining Association's site for info. Yes, they are an advocacy group too, but they don't claim to be something else.
  •  
    TAS
    Jan 16 08:21 PM
    My Website
    As the author of this article, I agree with you.

    The thrust of the article - looking at different sides of the coal issue and the impact upon a pure coal producing ETF - remains valid, imo.
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