Coal industry facing unprecedented financial challenges
Coal, still America's primary fuel source for electric generation, and top source of stationary greenhouse gas emissions, is facing tough challenges financially, with prices at near-record lows and coal company stocks taking a beating on Wall Street. The factors are multitude – cheaper natural gas, environmental regulations, and pressure from activists and investors concerned about climate change. It is likely that coal's prospects for future development and investment will remain grim, though its current dominant position will make the industry one for investors to watch for years to come.
Zack’s Equity Research ranks the coal industry at 210 out of 258 industries, and gave the industry a negative outlook in its July 2015 coal stock outlook. The reasons are numerous. Since 2010, over 200 coal power plants have either shut down, or announced plans to shut down in the United States, while not a single new one began operation. Coal futures hit a low of $52.85 a ton in August, more than 75 percent below its 2008 peak. According to a Bloomberg study, this is only one piece of the picture, as coal bonds are under-performing those of oil and gas companies. Bonds are necessary to fund investment into new mines, plants, and other infrastructure projects, another sign that coal's future is grim.
Previously, overseas demand from Asia has been expected to make up for the shift domestically, and, until recently, that was the case. However, China, the world's biggest coal consumer, has dramatically reduced its imports in the past year as it shifts towards clean energy and domestic coal. India, thought by many as the next coal boom-spot, has been missing its import targets, partly due to the rapid, unexpected rise of solar across the subcontinent. A Deutche Bank report released in July sees solar energy investments in India overtaking coal by 2019-20. This is why the United States Energy Information Association, in its short-term energy outlook released in early August, believes that exports will fall by 14 million short tons this year.
Another concern is that more and more mutual funds, pensions, and endowments are shifting their investments away from coal. Last week, the California Academy of Sciences announced that it would no longer invest in coal and other fossil fuels. They join Norway's Government Pension Fund, the Lutheran World Federation and a growing number of institutions that are refusing to invest in coal, citing its high risk, climate impact, and uncertain future. “The divestment movement has been a large part of what’s created a negative business climate for coal investment,” said Ted Nace, founder of CoalSwarm, to ThinkProgress.
Another big hit is potentially on the horizon, as in early September, the California legislature will likely vote on SB 185, which divests the state's massive, multi-billion dollar pension fund specifically from coal. “One of the many reasons this bill is getting so much interest is that fossil fuels have been a huge drag on [California pension] portfolios,” said RL Miller, chair of the California Democratic Party's environmental caucus and cofounder of Climate Hawks Vote, citing a recent Trillium Asset Management report that found $840 million in losses from pension fund stock investments in the world’s largest coal companies during the past fiscal year.
Policy is also impacting coal. President Barack Obama and the Environmental Protection Agency released the Clean Power Plan in early August, which specifically targets emissions from coal-fired power plants. These regulations, if fully implemented, could further increase the cost of electricity from coal and make it less competitive when facing natural gas, solar, and wind energy. The coal industry’s initial reaction was to protest the regulations as unfair. Currently, many coal-fired power plants across the country are unprepared to reduce their emissions, and thus, many experts believe the plan to have a negative impact on the coal industry. For now, coal still accounts for 34-40 percent of U.S. electricity generation, but most expect that number to fall steadily in the coming years.
However, it will require decades of new investment in renewable energy to displace coal’s current dominant market position. Companies that are willing to make the necessary investments to comply with regulation, or are willing to diversify their holdings into renewable energy or natural gas, may offer upside potential to investors once the industry finds a new equilibrium in price.
Companies to watch
Peabody Energy (NYSE: BTU) is the world's largest private-sector coal company, with revenue of $6.79 billion a year. Its coal fuels approximately 10 percent of the electricity generated in the United States. Its stock is down 85 percent in the past year.
Duke Energy (NYSE: DUK), one of the largest electric power holding companies in the United States, surprisingly spoke in favor of the Clean Power Plan. They have retired more than 40 coal plants in the past decade, and their diversified energy portfolio may make them a rare bright spot in the industry.
Australia is the world #2 coal exporter, sending most of its coal to China, and its biggest coal miner is BHP Billiton (NYSE: BBL). In fiscal year 2015, they produced 43 Mt of metallurgical coal and 41 Mt of energy coal.
Nithin Coca is a freelance journalist who focuses on energy, environment, and economic issues in developing countries, and has specific expertise in Southeast Asia. Nithin's feature and news pieces have appeared in global media outlets including Al Jazeera, Quartz, Atlantic Cities, SciDev.Net, Southeast Asia Globe, The Diplomat, Penang Monthly and numerous regional publications in Asia and the United States