Coal Industry: The Issues Threatening The Big Coal Comeback (PKOL, KOL, LNG, BTU, MT)
Joseph Hogue: Coal and coal-producers have been hit hard over the past year as a glut of natural gas in North America drives utility switching, and slower growth in China threatens demand.
The PowerShares Global Coal fund (NYSEARCA:PKOL) has fallen more than 34.3% over the last twelve months.
Problems at a reactor in South Korea last week, combined with the large-scale shut down of Japanese reactors, means coal may see increased demand this year.
Bloomberg reports that the Kori 1 reactor in South Korea was shut down on March 13 for safety issues and that an incident on February 9th caused the core temperature to rise dangerously high. This is as 53 of Japan’s 54 nuclear reactors remains off-line and widespread protests against nuclear power means the region will be looking for other sources of energy.
Imports to India and across Asia should increase this year as energy production costs half as much using coal as any other source besides nuclear power.
Things may still get worse for coal over the long run as companies apply for natural gas export licenses in the United States.
Bloomberg reports that Cheniere energy (NYSE:LNG) is close to obtaining the necessary permits to export liquefied natural gas to countries without free trade agreements with the United States, notably Japan. Natural gas in the U.S. is almost a tenth the price that it sells for in Japan and a ready supply would drive demand away from thermal coal.
Still, export facilities have yet to be built so any significant demand destruction is years away. Coal should still get a boost this year as Asia looks for an alternative to nuclear power.
ArcelorMittal (NYSE:MT) has significant coal interests along with diversified operations in integrated steel and iron ore. Despite a 49.5% drop in the past year, shares are still valued at 14.6 times trailing earnings.
Peabody Energy (NYSE:BTU) is a much more focused play on coal. The company has significant assets in Australia which make it a China play as well. Shares have fallen by 55.6% over the last twelve months but trade for a relatively cheap 8.1 times trailing earnings.
If coal prices (NYSEARCA:KOL) do rebound, investors may want to protect some profits with options hedging or diversifying across other energy plays.
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