Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Coal Isn’t Dead Yet

To say it has been a tough few years for coal investors would be an understatement. The stocks of Peabody Energy (NYSE: BTU  ) , Arch Coal (NYSE: ACI  ) , and Alpha Natural Resources (NASDAQOTH: ANRZQ  ) have been absolutely crushed on fears that the fossil fuel would bite the dust. Just one look at the following chart is enough to make any coal investor's stomach churn.

BTU Chart

BTU data by YCharts.

Things haven't been much better for these companies in recent weeks, either, as coal stocks were crushed earlier this month on warnings that Chinese demand isn't picking up. That being said, the commodity doesn't appear to be dead just yet. In fact, Peabody Energy's comments on its second quarter would suggest that coal's best days just might be ahead of it.

40-year high
While Peabody Energy lost money this past quarter, its revenue improved as coal continues to take global market share away from oil and gas. The company noted that coal now accounts for 30% of global energy consumption, which is its greatest contribution to the energy mix since 1970. Furthermore, Peabody Energy said it sees coal taking more market share: The world continues to turn to coal as a competitive fuel source, and that should remain the case as urbanization and industrialization trends are expected to fuel long-term demand growth.

Peabody Energy's case for coal is compelling. It noted that China's coal generation rose 5% through June and that the country's economic expansion and government stimulus programs were just starting to gain traction. It sees accelerating economic growth translating into improved steel production and increased metallurgical coal imports in the second half of this year. That has to be music to the ears of investors in Alpha Natural Resources, which is a major exporter of metallurgical coal.

Source: Peabody Energy. 

Peabody Energy also noted that India's coal generation rose 12% through the first half of the year, while its metallurgical coal imports rose 26%. It added that coal stockpiles are at extremely low levels in the country. In addition, the country's new prime minister has stated that he wants to increase coal imports as part of his plan to boost economic growth, according to Peabody Energy. That's good news for Arch Coal, which has stated that it wants to increase coal exports to India.

Japan is another market that offers cause for optimism. Because nuclear generation remains offline there following the Fukushima Daiichi disaster, and natural gas is expensive to import, Japan's only economical option is coal, which is why coal powered generation rose 9% through May. Overall, coal's share of electric generation in Japan has risen from 27% in 2011 to 35% this year.

Peabody Energy expects coal demand to rise by 600 million tonnes by 2016. Fueling this increase is the 250 gigawatts of new coal-fueled generation set to be built over the next three years, requiring another 750 million tonnes of thermal coal. However, because local production will fall short, Peabody Energy sees coal imports in India and China growing by 100 million tonnes. Needless to say, coal isn't dead yet.

The problem is the near-term outlook
While the longer-term outlook for coal looks compelling, it is challenged in the near term. Peabody Energy noted that the global seaborne marketplace for coal remains oversupplied. This is forcing producers around the world to cut back on supply, but those capacity reductions won't take hold until later this year.

Source: Peabody Energy. 

Meanwhile, coal's outlook in the U.S. is also a bit cloudy at the moment. While coal filled 92% of the incremental electricity demand in the first quarter, it faces an uphill battle to grow. The EPA's carbon dioxide emission rules, as currently proposed, would have a negative impact on coal power generation in the nation, which could have a big effect on coal production. Until there is clarity on these proposed rules, they will act as a weight on coal producers.

Investor takeaway
Coal certainly can't be counted out yet. However, its future in the United States remains uncertain, and the proposed carbon rules here, if enacted, could eventually spread abroad. That makes it particularly hard for investors to buy the global growth story, as coal stocks still have a tough uphill battle to fight. 

Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest...better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.

Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2014, at 8:43 AM, oldblarneystone wrote:

    The E.P.A. wants to destroy one of God's gifts to us.

  • Report this Comment On August 31, 2015, at 7:07 PM, dfm36410 wrote:

    Excellent article! My first time on this site and I am

    very happy with the information.

    Also, I am glad I joined MF.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3045030, ~/Articles/ArticleHandler.aspx, 9/1/2015 4:40:43 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

Today's Market

updated Moments ago Sponsored by:
DOW 16,058.35 -469.68 -2.84%
S&P 500 1,913.85 -58.33 -2.96%
NASD 4,636.11 -140.40 -2.94%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 4:03 PM
BTU $2.20 Down -0.50 -18.52%
Peabody Energy Cor… CAPS Rating: **
ACI $6.41 Down -2.90 -31.15%
Arch Coal, Inc. CAPS Rating: **
ANRZQ $0.05 Down -0.01 -19.26%
Alpha Natural Reso… CAPS Rating: **