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Like a hand out of the grave, coal stocks have achieved dominance in the stock market among industries, as tight natural gas supplies in Europe and supply chain issues in China and India have helped to put pressure on the market. on coal prices.
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An industry that went bankrupt five years ago has simply beaten the entire market this year. Coal stocks traded in the United States collectively gained more than 128%, compared to 17.8% for the S&P 500.
And the group’s gains have accelerated since the market swung into its current correction. A rally Alliance resource partners (ARLP) has climbed more than 167% since Dec.31. Ramaco Resources (METC) commands a gain of 390%. Consol Energy (CEIX) sailed over 350% higher.
The three top-ranked stocks in the industry all started the year under $ 10. And analysts remain clear that the industry remains locked in an existential crisis as climate change increasingly redirects Wall Street capital to less harmful energy sources.
But at least one European natural gas benchmark has risen nearly 400% since the start of the year, after last year’s harsh winter drained supplies. Last week Russian President Vladimir Putin agreed to increase the EU’s gas supply, possibly marking a spike in soaring natural gas prices.
Yet wind power and other renewables have not been able to fill the energy gap. This has left consumers and governments wondering if the “energy transition” away from fossil fuels is happening too quickly. Meanwhile, coal energy rushed to fill the gap.
“For an industry that may be dead by 2030, coal stocks have done surprisingly very well over the past two months,” Oanda analyst Edward Moya said. “The next evolution of coal prices will be determined by winter expectations in Europe and the United States”
Demand for coal grows amid energy crisis
Surges in energy demand have led to a dangerous drop in supply in India. And the world’s largest coal consumer, China, is expanding its supply relationships. But in the longer term, demand for coal has tended to decline in developed countries, especially in Europe, as they move to cleaner burning power generation options.
US coal consumption peaked at 1.1 billion tonnes in 2007 and has been declining since, according to the Energy Information Administration. The National Mining Association estimates that consumption fell to 477.4 million tonnes in 2020, of which 91% goes to power generation and about 8% goes to steel and other uses.
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Demand for coal plunged further at the height of the coronavirus pandemic. Global demand for coal fell 4% last year, the biggest drop since World War II, according to the International Energy Agency. Inexpensive natural gas has caused consumers to abandon the use of coal to generate electricity. The IEA reported that the use of coal for electricity fell 20% in the US and 21% in the EU last year.
But now those numbers could rise as Europe and the United States scramble for additional sources of energy.
The EIA projects U.S. coal production to reach 601 million tonnes this year, up 66 million tonnes – about 20% – from 2020, as rising natural gas prices increase demand for coal for electricity.
China plans green Olympics
Meanwhile, in China, the demand for and trade for coal has become more complicated. Sedimentary rock supplies more than 50% of the country’s electricity production. And Chinese leaders have drawn international criticism for continuing to build more coal-fired power plants, despite promises to cut emissions and achieve carbon neutrality by 2060.
But the 2022 Beijing Winter Olympics are only a few months away. President Xi Jinping said the games would be “green” and the city would meet World Health Organization air quality standards.
“It is not unreasonable to suspect that China has intentionally reduced its consumption of coal to try to clean the air in the face of this type of global event where it wishes to be viewed favorably,” said Phil Gibbs, analyst in equity research at KeyBanc Capital Markets.
At the same time, many parts of the country are struggling to store more coal, concerned about fuel shortages over the coming winter. As a result, the impact of the Olympics on China’s energy mix is likely to be short-lived.
In addition, news reports on Tuesday reported that China had started offloading some shipments of coal from Australia. The Chinese government banned Australian coal last year, after Australian leaders called for an investigation into how and where Covid-19 came from in China.
To offset the Australian ban, Beijing reduced tariffs on US coal, opening up its markets to US producers. Meanwhile, China is establishing new supply relationships and reviving old ones, buying coal from regions such as Kazakhstan and Indonesia.
Nonetheless, Yardeni Research reported that the Chinese government imposed unexpected power cuts. The China Electricity Council issued a statement announcing that the country’s power producers will continue to buy coal “regardless of cost.” Circumstances helped push China’s coal producer price index up 57.1% year-over-year through August.
Coal stocks at recent highs
Today’s coal companies have undergone tremendous changes over the past decade. Almost all of the major coal miners went bankrupt by mid-decade. They reappeared with new names, and usually as low-priced, lightly traded stocks after the reorganization. Arch Coal emerged from Chapter 11 bankruptcy in 2016 and has since become Resources of the Ark (CAMBER).
Peabody Energy (BTU) came out of bankruptcy in 2017. But the coal stock has faced new financial woes amid the pandemic and, before issuing a series of layoffs in 2020, warned it could default. .
As the old coal companies came out of bankruptcy, Ramaco Resources (METC), a developer of metallurgical coal, went public in 2017. It was the first coal company to issue an initial public offering in 10 years. Ramaco is currently No. 2 in IBD’s Energy-Coal group, just behind Alliance Resource Partners.
Most coal stocks are extensive
Metallurgical coal, also known as coking coal, is also a key ingredient in steel production. Electricity generation is by far the main use of coal in America. It accounted for about 92% of total U.S. coal consumption in the first quarter of 2021, according to the EIA.
However, the coal prices achieved are essentially double those of thermal, which makes it an attractive market. Plus, crossbreed coal tends to get better environmental, social, and governance ratings – the ESG metric that propels so much of Wall Street’s capital shift.
The five top-ranked stocks in the industry are extended. Alliance, Ramaco, Consol and Arch Resources all rebounded from their 10-week moving averages during the week of September 24. Natural Resource Partners is also extended, up 18% after a breakout from a flat base as the Nasdaq slid on September 19. 29.
Peabody is back above his 10 week moving average, and there are four weeks of consolidation that could potentially turn into a base.
Investors have little choice but to focus on individual stocks. The last ETF dedicated to coal stocks, the VanEck Vectors Coal ETF, closed in December 2020.
Coal and green energy
While demand and prices for coal experience a resurgence due to short-term energy factors, the long-term outlook remains murky.
The number of coal mines in the United States fell to 551 by the end of 2020. This represents an 18% drop from 2019 and 62% since 2008, according to the EIA.
And climate change, which is no longer relegated to the sidelines of investor meetings, signals increasing investor pressure on US coal companies.
The IEA rocked the energy industry in May with a report that recommended halting all new spending and exploration on new fossil fuel projects in order to meet the carbon emissions targets set out in the IEA. Paris Agreement.
The focus on climate is part of the ever-emerging ESG trend that has become increasingly influential on Wall Street.
Future of coal and price outlook
Meanwhile, other mining companies are leaving the coal market to extract other minerals as part of green energy focused on reducing carbon emissions. The United Kingdom Rio Tinto (RIO) sold the last of its coal assets in 2018. Vale SA (VALE) moves away from the coal.
Many of the biggest mining companies, like Australia BHP (BHP), strive to direct investors to the segments necessary for the production of solar, wind and other renewable energies.
Cobalt and rare earths enter the batteries of electric cars. Commercial photovoltaic solar panels require money. Copper is important in wind, solar and hydroelectric power generation equipment.
Meanwhile, as coal stocks recover due to the unusual energy mismatch in Europe and supply chain issues in China and India, analysts do not expect coal prices to remain bred in 2022.
“Once the winter has passed, coal prices should return to reality,” Moya said.
The fundamentals of coal have not changed, even as the power industry faces what analysts see as supply issues in the fall. Consumers, investors and governments will continue to pressure companies to reduce their carbon emissions.
Gibbs of Keybanc said increases in coal prices “tend to be very temporary”. Coal prices, for example, have climbed to $ 300 per metric tonne twice since the financial crisis, only to fall back as quickly as they rose. Gibbs projects have met with coal prices falling to between $ 165 and $ 180 per tonne in 2022.
“If the price of the commodity is sparkling and you’ve made money, it’s probably time to take a profit,” he advised.
Follow Gillian Rich on Twitter for energy news and more.
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