Why Coal Stocks Were Crushed Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Coal stocks fell off a cliff today in response to yesterday's election. Alpha Natural Resources (NYSE: ANR  ) and Arch Coal (NYSE: ACI  ) fell as much as 14%, and Peabody Energy (NYSE: BTU  ) fell 11%, while Alliance Resource Partners (Nasdaq: ARLP  ) and Rhino Resource Partners (NYSE: RNO  ) fell 10%.

So what: President Obama's win yesterday eliminates any hope that the president would reduce environmental regulations on coal, a hindrance the industry often points to. The industry spent millions of dollars opposing Obama, and it looks like the money has gone to waste as well.

But while investors are worried about Obama, they're overlooking the two factors that really led to the industry's decline. Natural gas, which has begun replacing thermal coal for electricity generation, has been steadily rising since May, and this will help spur demand for coal.

US Natural Gas Wellhead Price Chart

US Natural Gas Wellhead Price data by YCharts

Second, the industry has been shutting down high-cost mines that have led to oversupply, so the supply-demand imbalance isn't as bad as it once was. Macro forces are at least improving for coal, which is a good sign long-term no matter who is president.

Now what: I don't think the election really had anything to do with coal demand no matter the rhetoric, so I think this is a vast overreaction by investors. It will take time for coal to be replaced in America, and demand for thermal and metallurgical coal is still growing in emerging markets. Even under the Obama administration we've seen an improvement in earnings in recent quarters, and if natural gas continues to rise and the economy improves, I think the trend will continue.

I'm not bullish on coal, but I'm not as bearish as I once was, and I don't think the industry will die under Obama. What investors should look to do is diversify to growing energy sources like natural gas if they're looking for ways out of coal.

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Read/Post Comments (3) | Recommend This Article (2)

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  • Report this Comment On November 07, 2012, at 6:48 PM, Pogue1245 wrote:

    Isn't this just a normal seasonal rise in natural gas prices? It looks that way to me. Don't get me wrong, I am an owner of coal stock as a value and dividend play, so I WANT to be an optimist: but coal is being replaced by ng for electricity production and that's likely to continue. As for present and future foreign demand, no question that's going to be a major component of the market. But there are two markets, the metallurgical and the thermal. Each of them requires s a separate analysis, so investors should look a little deeper.

    The question that I ask is this: How long will it be before the environmental risks of fracking are translated into less ng drilling? I could see that becoming an issue when there is a recognition that wells are being poisoned by fracking chemicals.

    Disclaimer: I own ACI.

  • Report this Comment On November 07, 2012, at 11:46 PM, TMFFlushDraw wrote:

    @Pogue12245

    Good question. I have no idea. The EPA still has no jurisdiction over fracking so it's hard to build a solid case against it.

    The thing that may save fracking short-term is that NG shale drilling has come to a standstill and the industry is shifting to oil. It's easy to imagine that the likelihood of oil (a viscous fluid) following tiny cracks to a water source is much smaller than a gas doing the same.

    In short, I don't know when the gov't will crack down on fracking, or if it ever will.

    Travis Hoium

  • Report this Comment On November 09, 2012, at 10:04 AM, market8 wrote:

    What is the fastest growing fossil fuel? COAL

    Of course that is driven by emerging markets, especially China, but it is a fact. Also, emerging markets don't enjoy the cheap gas that the U.S. does, in fact is higher by several multiples. The end result is plenty of opportunities in coming years to export coal from the U.S. to the emerging world.

    Whether to buy now depends on if you want to be a contrarian and buy the value or wait for a clear bottom and uptrend to start at the expense of missing the first 10-20% of the move.

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