The coal industry is flexing its muscles — U.S. coal exports were up 60 percent through July on a year-to-year basis, due primarily to more robust demand in Asia and Europe. Meanwhile, U.S. coal production growth is expected to rise by 4.7 percent after years of decline, according to the U.S. Energy Information Administration.
Additionally, the EIA estimates that coal will be the leading fuel generator in the U.S. in 2017, just inching by gas, with coal producing 31.3 percent of the nation’s electrical supply compared to 31.1 percent for gas.
Coal stocks as an investment are up this year, as well. The benchmark VanEck Vectors Coal exchange-traded fund (ticker: KOL) is up 23 percent, compared to a 15.5 percent boost in the Standard & Poor’s 500 index over the same time frame.
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Individual coal industry stocks are on the rise, as well. Arch Coal ( ARCH) and Consol Energy ( CNX) both have expected earnings growth of 100 percent in 2017. Arch is trading at $80 per share with a consensus one-year price estimate of $94 per share. Analysts love the stock, with eight of nine Wall Street firms that cover the energy sector issuing a “buy” or “strong buy” call on the stock last month.
Meanwhile, coal industry companies that were once battling bankruptcy, like Peabody Energy ( BTU), are back on their feet and courting shareholders. After emerging from bankruptcy in 2016, Peabody is in the midst of a $500 million stock buyback program, signaling that the company “is continuing its laser-like focus on shareholder returns,” says Jeremy Sussman of Clarksons Platou Securities in a recent research note.
Plenty of the growth in coal stocks may be due to the lifting of Obama-era regulations of the Clean Power Act. After taking office, President Donald Trump, via the Environmental Protection Agency, lifted the ban on new federal coal leases, which has fueled an uptick in demand for coal.
That’s a big reason why coal prices doubled to $110 per metric ton after Trump was elected, compared to a year earlier.
“Under the current U.S. administration, the coal industry has experienced a short-term bump, so it’s a great opportunity to sell all interests in the sub-sector,” says Robin Lee Allen, managing partner at New York-based Esperance.
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Allen says he expects coal to remain steady in the next 12 to 15 months, followed by a period of pronounced volatility for oil and natural gas. The longer-term picture is nowhere near as rosy, though. “Coal is doomed,” he says, “but the short-term bump presents a prime opportunity for divestiture from the sub-sector.”
Overall, commodity prices, including energy, showed rapid growth this year on optimism around overall world economic growth, according to Alexander Kuptsikevich, an analyst with U.K.-based FXPro. “Over the past few weeks, however, we’ve seen an increasing number of reports suggesting that prices are already at too high levels for the world economy to maintain this current growth rate,” Kuptsikevich says. “With this in mind, investors should exercise caution when it comes to commodity sector stocks, which, following rapid growth earlier in the year, seem to be vulnerable to correction and even a further decline in prices.”
Kuptsikevich also notes that the renewable energy sector is struggling right now, giving investors another reason to kick some tires on coal stocks and funds.
“The sharp drop in raw material prices in 2014 allowed world economy to gain some growth pace, contributing to an increase in inflation for about a year,” he says. “Yet, this acceleration also led to a slowdown in investments in renewable sources. Thus, investors could perhaps be right in not rushing to investments in renewables and infrastructure, especially when traditional commodities are at such low levels, and when it’s been a mainstream belief for around two years now that traditional energy will remain at the low levels it’s at for the foreseeable future.”
One commodity that could prove to be a decent alternative to both coal and renewables in the long run as an energy investment is uranium.
“I see uranium as the next big energy source,” says Stan Tan, an energy investor and digital marketing professional based in Australia. “It generates more power than coal, and it’s cleaner, safer and hurts fewer people with the amount of pollution it generates, unlike coal.”
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China has already started converting their energy source from coal to uranium, Tan adds. “Look at the number of nuclear reactors being built in China,” he says. “Japan is also in the process of restarting their reactors.”
For now, coal is burning bright for energy investors, who are pouncing on the commodity at a time when politics is on coal’s side, and where performance is lighting up again after a long period in the dark.
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