The coal industry is rich in history, even over the past two years. But, its indefinite future is at best uncertain. Albeit brief, here's what investors should know about investing in the coal industry.
Coal is a component of American political debate
The U.S. Environmental Protection Agency drafted regulations that will require newly constructed coal facilities to capture emissions, notably carbon, released from the plants. And utilizing existing technology for the carbon capture and sequestration is quite costly, too. As a result, many coal companies and coal supporters have been expressing their dissatisfaction with the EPA. Thankfully for coal plants, though, the EPA announced that the technology to capture carbon emissions does not have to be installed on the existing U.S. plants. But, the capital intensive process of constructing a new coal plant combined with the new regulations implies that the industry may not be a stable source of energy long in the future. This is not good news for investors.
Additionally, investors must recognize the many subsidies and programs the government supports within the energy industry. Until 2008, the federal government primarily subsidized the fossil-fuel industry. Since then, the shift is toward renewables; for example, the Congressional Budget Office estimated that 67% of all federal subsidies within the energy sector were devoted to renewable energy and energy efficiency in 2011.
The bottom line is that investors must beware of regulatory and political factors affecting the industry.
A sour outlook on national and global scales
According to the Energy Information Agency, U.S. coal consumption dropped 21% between 2007 and 2012. Undoubtedly, the U.S. natural gas boom in the past decade has negatively affected the coal industry; natural gas consumption increased 10% from 2007-2012, for instance. And, it continues to grow.
Combining this information with global issues poses a big problem for coal producing Arch Coal (NYSE: ACI), Alpha Natural Resources (NYSE: ANR), Peabody Energy (BTU), and Walter Energy (WLTGQ).
These coal companies operate heavily with metallurgical coke, a product derived from bituminous (soft) coal. The metallurgical coke is required for applications needing high concentrates of carbon for heavy, mechanical purposes. For instance, it is used primarily for steel plants and foundry plants that produce chemicals or heavy metals. In short, it is utilized in a niche market.
New York-based HSBC estimates that U.S. exports are greatly declining due to global oversupply and stiff competition, notably with Australia. According to the Australian Coal Association, Australia is the world's leading coal exporter, and it anticipates a minimum 8% growth rate through 2017 for metallurgical coal. The U.S. firms also face pressure because the Australian dollar is weak compared to the USD, further increasing the nation's ability to export coal.
All of these factors should warn investors to beware of Arch Coal, Alpha Natural Resources, Peabody Energy, and Walter Energy. Plus, the firms are facing financial woes.
| Arch | Alpha Natural | Walter | Peabody | |
|---|---|---|---|---|
| Operating Margin | 0.67% | -3% | -9.75% | 6.80% |
| Profit Margin | -10.70% | -7.96% | -60.44% | -11.85% |
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Data from Yahoo! Finance; Trailing 12 month as of 6/30/13 |
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Even given this information, Arch's CEO John Eaves believes his firm is heading in the right direction. In the most recent earnings report he is stated as saying:
We achieved a sequential improvement in our earnings as we continued to manage our business effectively in the face of weak coal market conditions....Looking ahead, we remain sharply focused on further reducing discretionary operating costs and capital expenditures across the organization."
But, last quarter Arch posted a $0.34 per share loss for investors. Even though Eaves is hopeful, the outlook still seems bleak. The some holds true for Arch's competitors. Walter Energy, for instance, reduced its costs by 10%; it still posted a $0.55 per share lost last quarter. Additionally, it sold 13.8% less metallurgical coke in the past quarter compared to the second quarter in 2012. Similarly, Alpha Natural's coal volume fell about 20% last quarter compared to 2012 data.
Undoubtedly, these coal producers will continue operations in the near future. But, even if they do rebound, they have a steep climb back to where they once stood.
Conclusion
The U.S. coal industry is rapidly undergoing major transformations. The once dominant coal industry is facing obstacles from government entities, other natural resources, and global competitors. Portfolios built to last to eternity may want to steer clear from this industry.
