COAL IS NOT DEAD: Fight to Win

jlk

COAL IS NOT DEAD. LONG LIVE THE KING. THE WORLD NEEDS POWER, AND WE HAVE IT.  WITH ASSOCIATED JOBS…and retail growth.

Ron McWilliams

On January 24, Peabody Energy (BTU) announced its quarterly results. At the time of its announcement, shares dropped 4.8%, bringing the stock down 8.4% for the past three months.  Though the firm reported a 5.9% increase in profits and record revenues, analysts cited growing environmental scrutiny, rising costs and competition from natural gas.

Peabody, as the largest U.S. coal producer, is poised to compete globally, through demand’s  necessities of logistics. Natural gas has its potential to be realized domestically and globally. But coal’s future home is global, and has a comparative advantage in competing for that home better than gas.

 Looking at the chart for the Dow Jones U.S. Coal Index, coal stocks have taken a beating, and have not realized the recovery in price experienced by the broader market. Where the S&P 500 experienced a downward trend from spring of 2011 running into the fall, it has recovered much of its losses and is running laterally against resistance.

Just as the S&P 500 is meeting resistance, it appears that the coal index is running laterally at support.  The chart for Peabody is essentially identical to the coal index’s chart. 

Perhaps the reason for the slide of coal shares starts with a general view, reflected in a comment made by Deutshe Bank’s Keven Parker, global head of asset management. On January 2, 2011, in an article by the Washington Post, Parker commented that coal fired electrical generation faces severe headwinds. He said that “Banks won’t finance them. Insurance companies won’t insure them. The EPA is coming after them…And the economics to make coal clean don’t work.” See, Washington Post, January 2, 2011, http://www.washingtonpost.com/wp-dyn/content/article/2010/12/31/AR2010123104110.html.

This followed action against coal by the EPA in March, 2011. Some 11 years prior, the EPA issued a determination that mercury emissions needed to be curtailed and coal was identified as a suspect. The EPA didn’t take action, which resulted in a lawsuit in 2008 by environmental groups. In 2009, a settlement was reached and on March 18, 2011, the EPA proposed new rules limiting various emissions from coal-fired power plants.

CONSEQUENCES OF REGULATORY CHANGE

The projected up shot of this is that scrubbers will be needed. If the more expensive devises are necessary, closure of coal-fired facilities could cut U.S. domestic coal demand in the eastern U.S. by 76 million tons through 2015. The cut in the west could be 50 million tons. This results in a total drop in U.S. demand of 126 million tons annually. Compare this with current demand. In the period through Q3, 2011, the U.S. consumed 776 million tons according to the Energy Information Administration.

If a cheaper form of scrubber suffices, the result will amount to a 31 million ton reduction in the east, not necessarily the west. The reason is that western coal, from the Powder River Basin, tends to burn cleaner.

Going from the EPA to Australia, we know that carbon emission taxation must figure into the above charts. Despite PM Kevin Rudd losing his position due to the carbon debate, the new PM,  Julia Gillard,  proposed a renewed effort for carbon taxation in April, 2011. Her proposal suggested a taxation rate of only $23/ton. The initiative passed parliament, and then became law in November of 2011 by passage of the Senate.

Carbon taxation passed in a major natural resource supplier to the world. In Australia, the initiative produced fear among Australian people. They worried about their power bills, while industry worried about reduced margins, and developing LNG companies worried about added costs.

Still the proposition passed. U.S. based ETF iShares MSCI Australia Index Fund (EWA) shows the performance of Australian stocks. Its’ decline seems to mirror U.S. coal stocks, especially in terms of the early timing of the stock down turn. Certainly, this Australian fund shows recovery like the S&P 500, and thereby diverges from U.S. Coal stocks.

Perhaps the various propositions against coal energy made the globe feel even more insecure. After all, Europe’s financial issues  are serious, add to it already shrinking GDP propositions, with fiscal austerity…..why not break the spine of the established and reliable infrastructure and supply of coal energy.