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Can Trump Alone Save the Struggling Coal Industry?

The coal industry continues to fight a very difficult battle, with challenges being flung from all quarters, domestic and international. In the U.S., declining natural gas prices , stringent regulations and additional impetus to solar and wind power generation through the extension of tax credits are steadily luring away utility operators from coal.

Jittery developments in key global markets and higher production countries like Australia and Indonesia, and, importantly, a stronger greenback, are making the export market fiercely competitive for the U.S. coal players.

After the new Clean Power Plan, was unveiled in Aug 2015, utilities like NextEra Energy (NEE) and Dominion Resources (D) which were already investing to create a green energy generation portfolio have enhanced their emphasis to generate more electricity from clean fuel sources.

At present the fate of the Clean Power Plan is uncertain, given the Supreme Court ruling in Feb 2016 to stay the implementation of the Clean Power Plan, and if President Trump starts acting in accordance to his pre-election promises then that can provide an impetus to the ailing coal industry. However, even with uncertainty looming large on Clean Power Plan, new investments are being directed towards natural gas and renewable-based power production, due to the low cost of natural gas and tax credits provided to produce more electricity from solar and wind.

Failing to cope with the continuous fall in demand and declining prices of coal, some coal miners have filed for bankruptcy. The latest on this list is Peabody Energy, preceded by names like Patriot Coal and Walter Energy. Notably, these companies had tried all possible means to remain solvent, but the harsh reality is that coal demand is gradually going down.

In response to the anti-carbon drive, utility operators are shutting down coal-based power plants and are directing fresh investments toward constructing natural gas facilities and adding more renewables. U.S. coal production touched its lowest levels in 2016 to 739 million short tons (MMst) since 1978.

Here are some of the severe headwinds that the coal industry is up against:

Environmental Legislations : Coal has been losing importance as a fuel source over the last few years, particularly in the U.S., in comparison with other sources that are less harmful to the environment. Concerns over the emission of greenhouse gases and global climate change have resulted in the formulation of new legislations and policies which emphasize the use of environment-friendly fuel sources, particularly in the power sector.

This has considerably slowed down the expansion of coal-fired capacity in the power sector, with utility companies now building new natural gas-fired plants and resorting to alternative sources of energy generation like wind, solar and hydro power.

The final version of the Clean Power Plan will ensure that coal consumption for power production in the U.S. will go down from the present level, unless the utilities invest more money to upgrade existing plants.

Xcel Energy Inc . (XEL) a Zacks Rank #2 (Buy) stock has already reduced carbon dioxide emissions during power generation by around 22% since 2005. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Another American Electric Power Co., Inc. (AEP) has eliminated over 5,500 megawatts (MW) of coal-fired capacity from its generation portfolio.

Natural Gas Substituting Coal : A major substitute for coal in energy generation is another fossil fuel - natural gas. Coal is being dumped in favor of natural gas, which due to extensive exploration and production, and a shale gas boom in onshore U.S., is witnessing significantly lower prices than in the past.

Natural gas is an attractive choice for new generating plants because of its relative fuel efficiency, low emissions, quick construction timelines and low capital costs. This trend is encouraging power generating utilities to not only convert their existing plants to gas-fired ones but to build new units.

The U.S. Energy Information Administration (EIA) expects natural gas to contribute to 32% of the total energy generation in 2017, while coal represents 31%. However, in 2018, the share of natural gas is expected to improve 33% while coal's share will remain unchanged.

Besides power generation, natural gas is being utilized in new projects in the fertilizer and chemical sectors.

Competition from Alternative Energy Sources : Apart from natural gas, the coal industry has been losing a major share of its electric generation demand to renewable sources of energy.

The EIA report reveals combined electricity generation from conventional hydroelectric and renewable will reach 1.753 billion KWh per day in 2017, exhibiting growth of 5.9% from 2016 levels. The production from the alternate sources is anticipated to reach 1.845 billion KWh per day in 2018, reflecting growth of 5.2%.

These renewable additions will eat into coal's share of electricity generation. Production of power from renewable sources is supported by most of the U.S. states though there is no national consensus regarding the percentage of renewables in the total energy mix. However, the Clean Power Plan will encourage energy conservation and efficiency plans, use of renewables and clean alternative technologies for lowering air pollution.

The extension of the Investment Tax Credit (ITC) for solar and Production Tax Credit (PTC) for wind will drive expansion of renewable generation units at the cost of coal. Making use of the government support, NextEra Energy expects to bring on-line nearly 2,400-3,800 MW of new wind projects over the 2017-2018 time frame.

Rising Competition & Stronger Dollar : Besides competition from renewables and natural gas, U.S. coal producers are also affected by rising export from Indonesia and Australia as well as a stronger dollar, which is making this commodity dearer in the international markets. International players enjoy the benefit of low mining and transportation costs, consequently making the coal cheaper than their American peers.

In Dec 2016, Indian energy giant Adani sated it will start construction at the $21.7 billion Carmichael mine in Australia by the middle of 2017. The company will mine coal and export the same to thermal plants of India, which is bound to increase competition for the U.S. coal exporters.

According to the EIA, weak coal demand, lower international coal prices and higher output of other coal exporters have jointly led to decline in coal exports from the U.S. In fact, in 2017, U.S. coal exports are anticipated to drop by 13.8% to 51.1 MMst and further in 2018 by 2.7% to 49.7 MMst.

Bankers Retreat : Capital-intensive coal projects are gradually losing favor among primary funders like banks and financial institutions. Banks are distancing themselves from coal projects and are rather getting involved in natural gas-based power projects.

To Conclude

In ' Coal Showing Signs of Turnaround, A Solid Long-Term Choice ,' we have focused on factors that can drive the industry forward.

Even though President Trump has made promises to revive the coal industry, it will be an uphill task for the new administration to repair the damage already caused to it. The new policies from the Trump administration might bring in temporary relief for the coal miners, but we are skeptical about the long-term viability of the new policies.

Billions of dollars are already invested to produce electricity from clean energy sources and more projects are being lined up for approvals, so the question arises in the policy makers' mind will it be feasible to revive coal industry in the long run. Carbon emission is a serious threat for our future and we all agree to this basic fact.

At present, we will advise investors to stay away from SunCoke Energy Partners L.P. (SXCP), which not only carries a Zacks Rank #5 (Strong Sell), but has also registered negative earnings surprises in two of the trailing four quarters. Additionally, its 2017 estimates have gone down by 11.4% in the last 30 days to $1.78 per share.

To overcome the difficult times and remain viable, coal producers are idling coal mines, lowering headcount, delaying capital expenditure plans and even resorting to selling their mines. Despite these initiatives, coal producers are bracing themselves for an extended down-cycle, as demand for coal might improve marginally in near term but its share in fuel mix is going down over the long term.

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Xcel Energy Inc. (XEL): Free Stock Analysis Report

SunCoke Energy Partners, L.P. (SXCP): Free Stock Analysis Report

NextEra Energy, Inc. (NEE): Free Stock Analysis Report

Dominion Resources, Inc. (D): Free Stock Analysis Report

American Electric Power Company, Inc. (AEP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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