ICE Newcaste futures Coal price for this month leapfrogged to...

ICE Newcaste futures Coal price for this month leapfrogged to $457 today. I suggest we are approaching new price norms in this realm. I have been tracking bacwardation movements on the 1 year forward contract price compared to the current month future price.

For example back in July price difference between 6-July-2022 and July 2023 contracts was $122, or 31% of the ~$400 coal price of 6-July-2022. Compare this to 6-Nov-2022 to Nov 2023 difference of $88, translated as 19% of current $457 coal price.

We can see that the backwardation gap is narrowing in terms of percentage, it has actually dropped some 12% since the the start of July while coal price has increased by about the same percentage. If we continue with this logic one would expect coal price to rise a further 19%, to $550 per ton before we reach parity with 1 year futures contracts, implying maximum market demand. We may have dips in the road along the way but the trend speaks for itself.

From thereon I would expect global capacity to catch up and invariably the trend would reach parity and stay there for a time or invert into a contango effect. Bulk of possible global fossil fuel disruptions have been played, there may however be more that could push the price further out.

My investment journey is looking to be a rather boring one, with all portfolios weighted 100% WHC, I will have all of my initial investment paid back in dividends in the next 18 months. With the new pricing environment and protracted global uncertainty it seems it would be best to hold for the next 10 years and compound the returns.

Trying to time the peak of the cycle in this environment seems tricky, and probably lose more money through CGT and imperfect timing than one would gain. It is not impossible for PE ratios to do something crazy in the coal industry and reach 30 in the next 10 years. After all, everyone is realizing how important the industry is, and sentiment might change in the major money market. It feels rather strange to sell at a PE of 10 even, why not keep all the franked payments and accumulate as many shares as possible if the SP dips well below its book value, to as much as half, like it did 2 years ago.