Coal is hot. Chinese demand for the original fossil fuel spurred a rally in coal futures in the U.S. and globally this year, underpinning coal company shares.
Additionally, some coal producers received a bump following the U.S. presidential election as Donald Trump publicly stated his intent to relax restrictions on all fossil-fuel production, including coal, in his first 100 days in office. His pick of Scott Pruitt to lead the Environmental Protection Agency underscores that support since Pruitt, as Oklahoma’s attorney general, is suing the EPA about the Obama administration’s Clean Power Plan, which seeks to reduce carbon emissions by limiting coal use.
Even though renewable energy and natural gas have made inroads to the U.S. energy mix, coal still powers 30 percent of U.S. electricity usage. Natural gas’ share is 34 percent, nuclear is 19 percent and renewables are at 15 percent, according to the Energy Information Administration, the statistical branch of the U.S. Energy Department.
[See: 8 Ways President Donald Trump Will Affect Wall Street.]
Although coal will never be the dominant energy source that it once was, it’s not going to completely go away anytime soon, says Denver-based Ethan Bellamy, a senior research analyst at Robert W. Baird & Co.
“Coal likely will have a role in the energy-supply stack for decades to come, barring anything short of an outright ban on fossil-fuel production or consumption,” Bellamy says.
Still, other analysts say while the sector offers some short-term opportunities, they warn investors that coal isn’t something they recommend as a buy-and-hold investment. “My view is coal is on this long-term secular decline (but) it’s not dead completely,” says Matt Miller, equity analyst at CFRA in Denver.
Here are three tactical reasons to consider buying coal.
Regulations may be eased. Although Trump is light on details regarding his administration’s plans to loosen regulations on fossil fuels and a campaign promise to bring jobs back to coal-mining regions, coal companies still could see a short-term bounce in the early days of his presidency, says John Person, president of National Futures.
Bellamy says he also expects Trump to be more friendly toward coal versus Obama’s policies.
“A long, multi-decade regulatory arc constraining emissions from coal-fired power reached a tipping point under the Obama administration,” Bellamy says. “We anticipate that the elimination of regulatory constraints under a Trump administration on the coal-mining supply chain, along with less onerous emissions restrictions at power generators, could combine to alleviate some further declines in coal demand, and, possibly, to restore some lost market share as natural gas prices rise over time.”
Based on looser regulations there might be some tactical buys for coal companies, Person says.
“If I need to have exposure in energy or was looking for an opportunity, I’d look at (coal) from the short term,” Person says. “Energy usually has upswings in the early part of the year, and that may coincide with Trump’s first 100 days in office from when he’s sworn in in January.”
He says investors should look at coal companies that didn’t fall into bankruptcy recently if they’re seeking names. And he stresses anyone buying coal stocks should understand it is a high-risk gamble since the share prices could retreat if Trump isn’t able to make new legislation.
[See: The Best Energy Stocks to Buy for 2017.]
Based on trading patterns, Consol Energy (ticker: CNX) and Westmoreland Coal Co. ( WLB) appear the strongest, he says.
“Westmoreland seems to have a base around $7 to $8 since 2000, and in May 2015 it was trading around $30. It’s around $17 now, so I might buy a little here and hope for a pullback to add to the position,” he says.
Consol Energy seems to be trading more on its own accord rather than political influences since it didn’t have a bump after the election, Person says, and its performance on monthly technical-chart patterns “looks healthy.”
Exports to China and elsewhere. Commerzbank analysts say the bump in coal prices comes from strong Chinese imports as that government tries to consolidate its coal sector. It recently cut the number of working days in coal mines, which dropped Chinese output by 10 percent year-over-year from March to October, according to China’s National Bureau of Statistics, the bank says.
China is half the world’s global demand and supply, so a drop of 10 percent is significant, the analysts say.
Person says for U.S. coal demand to grow, it needs to look overseas, rather than domestically. Natural gas will give coal competition in many places in Asia, but if imported natural gas costs more than coal, that alone may make coal more competitive in the power sector, say analysts at Barclays.
“Given a lack of domestic production, imported gas prices are typically higher in many Asian countries. For this reason, the levelized cost of electricity generation for new and existing coal will likely be below that of gas,” Barclays says.
There is a caveat, though. Commerzbank says long-term China wants to rely less on coal and more on less carbon-emitting sources like renewables and nuclear energy, which suggests their imports are just a short-term bump. Plus, Person says, a big unknown here is the outlook for trade with China and other countries.
Not all coal is the same. There are two types of coal, metallurgical coal, known as “met” coal, and thermal coal. Met coal is used in steel production and other industrial uses, while thermal coal is used for heating. It’s the coal that’s being replaced by natural gas in power plants.
Met coal could see increased use if promised infrastructure projects actually break ground, CFRA’s Miller says.
He also cautions investors to not chase the met-coal price rally, which he thinks will taper back. That said, on a year-over-year basis, he suggests 2017 looks better for this type of coal than 2016 if the overall industrial commodities rally remains intact and infrastructure spending materializes.
One name he likes for a short-term play is Canadian miner Teck Resources ( TECK). The stock has seen a significant price rise, but even so, Miller recently upgraded his view on the company. Much of their revenue comes from met coal, along with zinc and copper, two commodities that have seen prices rise recently.
[Read: 5 Reasons Donald Trump’s Presidency Will Include a Recession.]
“The outlook for commodities has improved,” he says. “They’re seeing a catalyst from Trump’s surprise win and infrastructure planning increase. The sentiment among commodities in general has improved.”
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3 Reasons to Buy Coal Stocks originally appeared on usnews.com
