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There’s no time like the present to get involved in the coal sector.
The coal industry’s recent troubles are no secret. Australia in particular is struggling as its coal producers cut costs and reduce production, and concern is mounting worldwide as bodies like the United States, World Bank and European Investment Bank withdraw support for coal projects.
However, in the past week, three different sources have released encouraging news for coal’s short-term prospects.
Moody’s upgrades US coal outlook
In a report titled US Coal Industry Outlook Stabilizes as Business Conditions Hit Bottom, Moody’s Investors Services bumped its outlook for the US coal industry up from negative to stable, stating that although business conditions are still weak, it does not see industry fundamentals “deteriorat[ing] further over the next 12 to 18 months.”
Anna Zubets-Anderson, vice president-senior analyst at Moody’s, commented that the upgrade is a result of the agency’s expectation that “over the next year or so coal-fired power plants will capture roughly 40% of US electricity generation, up from 37% in 2012.” She also noted that until mid-2014 or early 2015, “[s]ustained natural gas prices” will hold up demand for thermal coal used to produce power, while metallurgical coal prices should be stabilized by “supply rationalization.”
On a different note, as a result of high mining costs and competition from natural gas, Moody’s sees Central Appalachian coal producers losing market share to companies operating in the Powder River and Illinois basins.
European coal use increasing
Another report, this one from Frost & Sullivan, is similarly optimistic about coal in Europe. It states that during the last couple of years, coal has “suddenly become popular once again” even though the European Union wants to reduce carbon emissions to 80 percent of their 1990 levels in the next seven years.
In a press release, Harald Thaler, industry director at the company, explains the situation by stating, “[f]irstly, the North American shale gas revolution had a direct impact on the coal market. Rising shale gas output has made the US independent of gas imports and has led to a dramatic decline in the price of natural gas. As North American utilities started to switch away from coal towards cheap natural gas, a growing amount of coal was exported rather than consumed locally. Rising American coal exports also came at a time of slowing Chinese demand, which in combination prompted declines in coal prices. It is not surprising, therefore, that lower coal prices make the fuel much more attractive for European utilities.”
Also contributing to European coal demand is the fact that natural gas prices in the area are “stubbornly high,” meaning that it is cheaper for European utilities to use coal instead. Further, as yet the European Emissions Trading System has not been able to punish coal-burning plants.
Thaler expects that, as in the US, “high” coal usage in Europe will “continue for several more years.” After that, the future is less certain. That’s because beyond the “considerable” number of coal plants set to come online late this year and in 2014, there are not many coal plants on order. Poland, Turkey and the Balkans are the most likely builders, but currently there are no guarantees that they will go down that path.
2020 cut off for thermal coal
Driving home the point that coal may start on a downward slide not far into the future is a recent research paper by Goldman Sachs (NYSE:GS). It outlines the firm’s belief that “[e]arning a return on incremental investment in thermal coal mining and infrastructure is becoming increasingly difficult,” noting that three main factors are weighing heavily on thermal coal. Those are:
- Environmental regulations that discourage coal-fired power generation.
- Competition from gas and renewable energy.
- Improved energy efficiency.
Goldman believes that in the next 10 years or so, those factors will likely cause weaker demand and oversupply, pushing prices lower and threatening the viability of growth projects. Specifically, the firm thinks that seaborne thermal coal demand could peak in 2020, which means that until then, the “window for profitable investment in thermal coal” will be gradually closing.
No time like the present
While the long-term coal outlook from these three reports is not overly promising, all are clear on the fact that it’s now or never for those interested in getting into coal. Wait too long and the chance to profit will likely be gone.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Related reading:
Coal Giants’ Lay Offs Could be a Boon to Oversupplied Australia