Warren Buffett’s BNSF Buy Looking Smarter as Coal Surges

Buffett: a clever bet on coal

O, Oracle of Omaha, how could we ever have doubted that your bet on coal was a wise choice?

Now, as coal prices have surged more than 40 percent from last year’s lows, we see three reasons why Warren Buffett’s purchase of the Burlington Northern Sanata Fe railroad – which hauls 1/5 of the nation’s coal – was smart.To review: Buffett announced in November that Berkshire Hathaway would pay $34 billion the three-quarters of the massive railroad that it didn’t already own. We initially doubted that it was a bet on coal though we later reversed and declared that Buffett was going long CO2.

Bloomberg – it’s up to $59.28 per ton, with a target of $70 – this morning, which helps us quantify Buffet’s genius.

1) Brrr…. It’s cold out there.

The winter has also been very cold in some areas of the country, driving greater demand for coal to feed powerrplants and shrinking stockpiles.

If you live in the I-95 corridor, you may have noticed that it’s snowed a bit this winter. A smallish, swampy city near Virginia, for example, has received 54.9 inches of snow – breaking a 110-year-old record.

Dahlman Rose & Co. analyst Daniel Scott tells Bloomberg,

“The cold weather the best thing that (coal suppliers) can get right now that’s not a full economic recovery.”

2) China is hungry

Is it ever. The Chinese economy has been importing coal at a record rate because of a frigid winter and a superheated economy that grew at 10.7 percent last quarter over the same period last year, Bloomberg reports.

The country’s National Energy Administration is forecasting a coal shortage through March.

China’s economic growth, more than any other factor, should keep coal prices high.

3) Global warming legislation is stalled

In case you missed it, the U.N. climate summit didn’t yield great results and a cap and trade bill that showed so much promise when it passed through the U.S. House of Representatives in the spring has stalled in the senate.

A tri-partisan coalition in the senate of Lindsey Graham, R-S.C., John Kerry, D-Mass., and Joseph Lieberman, I-Conn., about trying to revive the climate bill talks but the goal seems a long way off right now.

The big winner when climate legislation gets railroaded is… coal!

Both BNSF and Berkshire Hathaway are both up but there are a lot of factors involved in those valuations and, anyways, that’s beside the point. The point is that Buffett has the right instincts about the energy economy.

Those instincts tell us that the green energy future is still taking a backseat to the dirty energy past and present.

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  • sykemol

    The author got it spectacularly backwards. If coal becomes expensive, then other forms of energy like natural gas or renewable become more attractive–hence less coal use. The Bloomberg article points that out very clearly. Coal production is down almost three percent, and coal is losing market share to natural gas.

  • Matt

    The commenter is absolutely correct.
    To clarify,– when I wrote, “those instincts tell us that the green energy future is still taking a backseat to the dirty energy past and present,” I was referring to big-time investors like Buffett pouring $34 billion into BNSF as opposed to wind farms.
    Thanks for reading,