The investment case for RMB’s coal ETN

[] — THE enterprising folks at Rand Merchant Bank (RMB)
are hopeful their newly launched exchange-traded note (ETN) backed by physical
coal gathers more momentum after trading 400 tonnes on its first day last Thursday.

The instrument is identified on Bloomberg as COLRMB and provides speculators and
investors exposure to the fuel market without the extreme volatility of the oil market.

Not everyone’s a fan, however. Paul Theron, the founder of Vestact, tells me he’d
much rather back Exxaro Resources for his coal exposure than invest in an ETN.

He’s also wary of the complicated business of covering currency risk. Certainly,
Exxaro Resources is a well-run company and you’d have done well if you’d bought its
shares last year, the stock having traded 50% higher since its June-released interim
results. In fact, shares in Exxaro are 3.7% higher today at R171.50/share.

Theron’s point is that you can hold any basket of commodities but they don’t pay
cash out at interim and final stages as a blue chip share might. He would rather take
the capital appreciation and a good dividend yield. That makes sense viewed through
a certain lens. Ultimately, it’s how you view the risk: one of the benefits of ETNs and
exchange-traded funds (ETFs) is that the frailties of human judgement, known as
management, are removed. So are other exogenous factors.

On May 23, Transnet Freight Rail is shutting down the so-called Richards Bay Coal
Terminal (RBCT) line, which runs from Mpumalanga province to Richards Bay, for
some 20 days due to maintenance work. This may punish the listed coal producers,
especially the pure plays such as the R7bn Optimum Coal Holdings and Keaton Energy
Holdings, but possibly benefit the coal-backed ETN.

Producers will continue to ship through RBCT using inventories but in a market where
coal is in constant deficit, the uncertainty created by Transnet-related supply
constraints can only be positive for coal prices from RBCT.

Riette Theunissen, an oil and coal commodities trader for RMB, believes asset-backed
paper exposure to commodities will only grow. “Coal is the unpopular cousin of oil but
it really is a safer bet for certain investors as it trades more solidly off
fundamentals,’ says Theunissen. In comparison, oil is informed by a number of
geopolitical factors, not to mention the activity of hedge funds short and long of the

If you believe her, then you could look to buy a single coal-backed certificate for
some R808 as of last week, with offers coming in quite a wide spread of R844.
Theunissen advises investors to trade the share later in the day, when the market
has had more time to settle.

But perhaps the real take up of ETNs and ETFs, in the South African market
specifically, is strongly linked to the regulatory environment, especially any advances
in the liberalisation of Section 28 of the Pensions Fund Act which governs investment
managers’ ability to trade in products, such as ETNs, as well as offshore investments
in general.

Noah Greenhill, a director at the JSE, says changes to parts of the Pension Fund Act
are “certainly on the table” and may result in certain liberalisations. The London
School of Economics’ Centre for Research into Economics and Finance in Southern
Africa has produced a paper detailing options for improved offshore investment, but
the outcome ultimately rests with what the National Treasury and the Financial
Services Board decide.

In the meantime, expect more listed instruments in the commodities sector
notwithstanding the hysterical fears of a minerals blowout. There’s unconfirmed talk
of a copper ETN on the horizon.