The coal industry's lousy November might be taking a turn for the better. Coal companies spent millions trying to get Mitt Romney elected as president – and failed. But, while the Obama administration implemented tougher permits and stricter emissions regulations in the president's previous term, it now seems the administration is negotiating a ceasefire on the so-called war on coal.
Ashes, ashes, we all fall down?
The day after Obama won reelection, Peabody Energy's (OTC:BTU) stock fell 9% and Alpha Natural Resources' (NYSE: ANR) fell 12%. Investors, and coal companies, were expecting a Thor-sized hammer to come crashing down on the industry. But what they're getting so far seems more like a love tap.
One of the biggest bones Obama is throwing to the coal industry is maintaining the current designation of coal ash, a byproduct of coal combustion. The ash contains harmful chemicals like arsenic and lead. This coming summer, the Environmental Protection Agency, or EPA, is likely to rule that coal ash will keep its "solid waste" designation instead of the "hazardous waste" label environmental groups are hoping for.
Coal companies recycle about 40% of coal ash into products like cement and drywall. By comparison, Europe recycles about 50% of its coal ash and China recycles about 30%. The EPA states on its website: "[There] are important benefits to the environment and the economy from the use of coal ash in encapsulated form, such as in wallboard, concrete, roofing materials and bricks, where the coal ash is bound into products." But the majority of ash is placed in containment ponds. The ponds have been a controversial topic after a large amount of ash spilled from one into 300 acres of a Tennessee community back in 2008.
Coal companies might not think Obama and the EPA have gone far enough, but they should be happy with what they're (possibly) getting. Low natural gas prices have hurt the coal industry, contributing to coal's loss of 7,000 jobs in the past year. If coal ash keeps its current designation and is not categorized as hazardous waste, then some coal jobs would be saved.
A look ahead
Alpha Natural Resources is down 71% year over year, Peabody is down 35%, and Walter Energy (OTC:WLTGQ) has seen a 60% loss – but despite losses the coal industry isn't going anywhere. The Energy Information Administration expects electricity from coal to make up 35% of all U.S. electricity in 2040. That's down from about 42% in 2011, but it's still more than a third of our total generated electricity. Investors should look for coal companies that can adapt to ever-changing regulations and work with the current administration. Coal plant and production efficiency is what will keep some companies afloat. I'd have a hard time jumping in with any coal stock right now, until I see how companies will handle slow coal production growth in the coming year.