The once-mighty coal industry is entering its final acts, say more than a few analysts, doomed by climate change and falling costs of cleaner energy. Yet coal stocks are burning bright as a natural gas supply squeeze stokes demand. The question: Will that continue?
Coal stocks staged a steep, 26-month rally running to June. In recent weeks, natural gas prices have eased from better-than-decade highs in the U.S. and record levels in Europe. But European countries remain desperate for fuel sources after Russia invaded Ukraine earlier in the year.
Coal miners including Alliance Resource Partners and Consol Energy continue to show constructive chart action.
The unexpected rally in coal stocks came less than a decade after a slew of bankruptcies roiled the industry, and as the Biden administration and the U.S. energy sector have taken a strict stance against carbon emissions. The fracking boom begun early in the century placed the U.S. atop the world's natural gas producers, driving gas prices far below where coal could compete.
But even before Russia invaded Ukraine, gas prices in Europe were climbing sharply on supply concerns. Russia's weaponizing of gas supplies accelerated that climb, and ignited a race to supply liquefied natural gas to the EU.
Combined, those factors quickly proved that "rumors of the death of coal have been greatly exaggerated," said Harrison Fell, a professor of energy economics at North Carolina State University.
"If you were able to survive the last decade or so, you're doing really well right now," Fell said. "Most of those coal mines have all of their coal already contracted out, and what they can sell on the spot they're selling at a massive premium right now."
Coal Stocks Pause After Rally
The renewed coal demand has left the industry with the largest year-to-date gain among the 197 industry groups tracked by IBD. The 12-stock group more than doubled for the year through mid-June, even as the S&P 500 fell nearly 23%.
Coal stocks have largely consolidated since June. The group remains up 53% year to date, and the question is whether it is girding for another run higher or is preparing for a more serious pullback.
Alliance Resource Partners is up 90% since the start of the year, but pulled back in a test of support at its 10-week moving average. Consol Energy is wrestling to regain support, and still has a year-to-date gain of 185%.
Alpha Metallurgical Resources and Arch Resources have also scored big gains, but their charts have taken a beating in the pullback. Nacco Industries, with a 50% gain, is in a deep cup base — risky after such a long, steep industry rally.
Coal Industry Gets A Debt-Free Makeover
Today's coal miners are the survivors of more than a decade of inordinate change. Nearly all leading coal miners descended into bankruptcies midway through the last decade. Many popped back up under new names, generally as low-priced, thinly traded stocks after reorganizing and some consolidating.
Arch Coal emerged from Chapter 11 bankruptcy in 2016 and has since become Arch Resources. Alpha Metallurgical Resources was formerly Contura Energy, and Peabody Energy, which is the largest coal producer in the U.S., exited bankruptcy in 2017.
With lightened balance sheets and lowered expectations, coal stocks turned around as global market dynamics shifted. Now, after U.S. natural gas prices recently hit a 14-year high of $10 per million British thermal units, coal is once again competitive. Gas has eased from those highs, but remains more than 250% above where it traded at the end of 2019, just before the Covid pandemic kicked in.
As a result, coal companies are on track for sky-high profits this year. But analysts see earnings reversing in 2023, with energy prices expected to stabilize somewhat.
Wall Street forecasts AMR's earnings will grow 447% to $83.08 per share for the full year. However, analysts predict full-year profits will fall 57% to $36.09 per share in 2023.
ARCH profits are expected to gain 214% to $60.23 per share in 2022, according to FactSet. However, analysts see Arch Resources' earnings retreating 45% in 2023, FactSet reports.
Natural Gas Prices And Coal
In August, the U.S. natural gas spot price averaged $8.80 per million British thermal units, up from $7.28 in July, according to the Energy Information Administration. On Wednesday, U.S. natural gas futures were angling toward a fifth straight weekly decline, down 22% from their late August high just above $10.
That was the commodity's first peek above $10 since natural gas prices spiked above $13 in June and July of 2008.
The Energy Information Administration (EIA) expects U.S. natural gas prices in Q4 to average about $9 per BTU and sees them falling to an average of about $6 in 2023.
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But U.S. natural gas prices are up 132% since the start of the year, and the prospects for increased supply remain spotty, at best. After it invaded Ukraine, Russia stopped gas flow to Europe through its Nord Stream pipeline.
European natural gas prices were already soaring after a harsh winter. Now, heading into a new heating season with depleted gas in storage and significantly reduced supplies, the region is also seeing electricity costs skyrocket. That is the cue for increased coal sales.
"Europe is between a rock and a hard place," Rystad Energy senior analyst Lars Nitter Havro said in a recent statement. "Countries across the continent are ramping up coal use to reduce gas dependency."
The Search For Fuel Flexibility
China and India have also experienced coal shortages, helping to send coal prices around the world to new highs.
Europe's benchmark thermal coal futures have gone up around 90% since last year, to more than $320 per metric ton heading into late September. Australia's Newcastle coal, a benchmark for the Asian market, also hit a record of more than $450. U.S. thermal coal prices are hitting records of nearly $200 per ton.
In addition, sanctions and bans on coal from Russia have disrupted markets, according to the International Energy Agency (IEA).
"It's not just Europe that needs greater U.S. production and exports. The entire global market needs more coal," Rich Nolan, president of the National Mining Association, wrote on Aug. 22.
"As the world reembraces the value of energy security, coal is once again a linchpin of those efforts," Nolan added.
CFRA Research analyst Stewart Glickman said in an interview that many buyers will be seeking "fuel flexibility" and may prioritize being able to switch between coal and gas.
"You're going see folks want to preserve their option value in case gas prices do come down significantly," Glickman said.
Coal Stocks And Global Consumption Estimates
What about climate change? Pledges by companies, industries and countries to reach net-zero emissions targets leave the impression that the world is moving away from coal. And in the U.S., that impression may be accurate.
U.S. coal use peaked between 2005 and 2008, with more than 1 billion tons of coal burned each year, according to the EIA. The high water mark was 1.13 billion tons in 2007. Since then, as natural gas emerged as a cheaper fuel, coal consumption has dropped in the U.S.
Globally, coal use fell in many major countries over the past decade as governments and companies sought to reduce their carbon footprint. In 2022, however, global coal demand has edged higher. Looking ahead, worldwide coal consumption is on track to hit record highs, according to the IEA's Coal Market Update in July.
"Soaring natural gas prices following Russia's invasion of Ukraine are propping up the world's use of coal this year," the report said.
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The IEA projects global coal consumption will rise 0.7% in 2022 to 8 billion tons. This assumes China's economy recovers as expected in the second half of the year.
This global total would match the annual record set in 2013. The IEA believes coal demand will continue increasing in 2023 "to a new all-time high."
Worldwide coal consumption had already rebounded by about 6% in 2021 when the global economy recovered from the shock of the pandemic, the IEA reports.
Much of this is due to rising natural gas prices, the IEA says. The increased gas prices have "intensified" gas-to-coal switching throughout the world.
"That sharp rise contributed significantly to the largest-ever annual increase in global energy-related CO2 emissions in absolute terms, putting them at their highest level in history," the IEA added.
U.S. Coal Still Phasing Out
The U.S. is another matter. Goldman Sachs analyst Hongcen Wei wrote Aug. 15 that U.S. demand will likely continue to drop as coal plants go offline. The EIA forecasts U.S. coal production will increase by 22 million tons to 600 million tons in 2022. In 2023, production is expected to drop to 590 million tons.
U.S. coal exports are relatively small but rising, and have helped drive the rally in coal stocks. The EIA sees U.S. coal exports rising from 85 million tons in 2021 to 87 million tons in 2022. Exports are expected to hit 98 million tons in 2023. That is still well below the 2012 peak, when the U.S. exported more than 125 million tons.
Fell says the vast majority of U.S. coal goes to domestic coal-fired power production. Economics increasingly favor renewables, he says, and he doubts coal mining or coal-fired capacity will increase.
"I'm relatively bearish on coal for the long run," Fell said.
With the coming year's earnings outlooks pointing sharply lower, coal stock investors sitting on big gains will want to have clear exit strategies in place. Still, global coal use during that period is forecast to reach record levels. And market fundamentals for both coal and gas don't point to a break in upside pressure anytime soon.
While most of that upward pressure relates to global markets, prices and demand have so far bled through to the U.S. coal industry. But Third Bridge Analyst Peter McNally said in an interview that it's unclear how long those current circumstances might last.
"It's been a good run certainly for the coal companies, particularly after all the financial restructuring that's gone on," he said. However, "I don't think we're going to see a revival of coal."
Please follow Kit Norton on Twitter @KitNorton for more coverage.
