Still Bearish on Coal in 2013

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Taylor: Yeah. That's definitely a solid pitch for moving to this company in 2013. Is there a specific company or industry that you're bearish on, as we look forward?

Joel: Well, yeah, there's a few. For one, I would look at the coal industry in general. I'm not really on board there.

There's a lot of reports coming out that are saying by 2017 coal is going to be the most-used fuel. Yeah, that might be the case, but a lot of these companies, a lot of their advantage is being closer to their sources, so you need a lot of utilities within close proximity to the mines so you have that price advantage.

Also, you have to worry about excess coal right now in China, and if they take off their export tariffs, which they're threatening to do, they could flood the market very similar to what they did in the solar industry, where they want to be a competitor. They want to be a cost leader.

They'll take a loss to really flood the market. It really did damage to a number of companies in the solar industry. First Solar really was hit. A lot of the Chinese companies, too, have been ruined by the same thing.

The same thing could very easily happen in coal. There's just too much that I'm not really liking, long term. It is very risky, and I still like natural gas as a viable option. Coal is going to be needed; obviously, it's going to be a huge source, but I would rather put my money behind natural gas than coal.

Taylor: It makes a lot of sense. Companies like Peabody Energy, and you look at Arch Coal and Alpha Natural Resources really clamoring for higher natural gas prices so that, like you mentioned, utilities hope to switch back to the coal to generate this electricity.

If you look at a company like Exelon, really closed down the vast majority of their coal plants as they are the number one nuclear energy provider in the United States, and you look at Duke Energy, also really closing down a lot of their plants.

There's expectations for about 25% of all coal-fired energy generation to be shut down in the next couple years, either through inefficiency in these plants, or just old age because the EPA's regulations are mandating that new scrubbers are installed, and that's super costly as far as infrastructure spending.

Really, I'm expecting these companies to focus most of their efforts on exportation. You did see more exports of coal this year than any other year since 1991, so that's a huge boom for these companies right now, at least in the eyes of what's happening here, domestically.

But like you mentioned, huge transportation costs, so hopefully at Peabody... they have their Australian production, where they can then ship it to China and India pretty easily, so they're my number one pick in coal.

All underpriced, undervalued right now if you look at the reserves, but like you mentioned, they're really going to need a drastic change here in the United States to regain some of the ground they've lost.

They're coming at it from all fronts, really. You've got the EPA, you've got China now possibly reducing that 40% export tariff that they have. A lot of people blame it on the new administration – or the remaining administration – of Obama, but that's really not the case.

There are so many different dynamics working here against this industry that if you get into it you really have to isolate and pick the best one. In my mind, that's Peabody, but I'm not going to invest in them any time soon.


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