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Investors Business Daily
Investors Business Daily

The Clean Energy Era Isn't Keeping Coal Stocks Down. Record Demand Fuels Fresh Surge.

The once-mighty U.S. coal industry, it has been said, is on the back foot and entering its final act — doomed by legislation aimed at curbing climate change, by ESG standards and by falling costs of cleaner energy. But rather than digging their own grave, coal stocks rank near the top of this year's fastest-moving industries, collectively gaining nearly 40% since the start of the year.

Coal stocks launched into a steep rally in 2020. In 2022, Russia's invasion of Ukraine supercharged natural gas prices, making coal once again price-competitive. In 2023, coal stocks pulled back from March to early June. They then launched into an almost 75% rally — with the 13-stock group surging 25% in September.

Why? One piece of the complex answer is metallurgical or coking coal. Still a critical ingredient in traditional blast-furnace steel production, U.S. met coal comes from Appalachian region mines and earns a hefty premium to the thermal coal used in power generation. Met coal miners Consol Energy and coal supplier Alpha Metallurgical Resources have led the industry charge, soaring 61% and 52%, respectively, in 2023.

Meanwhile, among miners producing primarily thermal coal used in energy production, Alliance Resource Partners has gained 13% and Arch Resources edged up 7%.

Coal For Steel Takes Over

Another factor explaining recent coal stock performance is an industry shakeout. The current rally in coal stocks comes 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.

In addition, the energy industry fracking boom, started early in the century, drove gas prices far below where coal could compete.

The combination sent the industry's once all-mighty thermal coal sector into a steep decline. In response, the industry has increased its focus where possible on metallurgical coal.

"You cannot make virgin steel cost-effectively without coal today," B. Riley analyst Lucas Pipes told IBD in an interview. "Demand has been growing, supply has been shrinking. That's kind of the simplest story for coal itself."

Met coal exports priced in at $211.42 a ton, according to Energy Information Administration data for the second quarter, compared to $92.98 per ton for thermal coal exports. In Q2 2022, met coal prices soared to $343.91 per ton, vs. $104.24 for thermal coal.

Meanwhile, strong demand in Asia continues to drive the thermal coal market, with China still producing more than half of its electricity from coal plants.

"That, in a nutshell on the coal side, is why the coal stocks have been strong," Pipes said.

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 companies descended into bankruptcies midway through the last decade. Many popped back up under new names, generally as low-priced, thinly traded stocks after reorganizing.

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 volume coal producer in the U.S., exited bankruptcy in 2017.

ESG Pressures Leads To Clean Balance Sheets

With lightened balance sheets and lowered expectations, coal stocks turned around as global market dynamics shifted. They adapted and tended carefully to their balance sheets.

"The biggest theme in financial markets has been the relentless rise in interest rates," Pipes told IBD. "If you have a lot of debt and that debt (matures) too soon, you're in pretty hot water no matter what industry you're in."

On this front, coal had a little bit of help from clean-energy advocates. Pressures related to ESG investing effectively shut coal producers out of the credit markets over the past five years, Pipes said.

Unable to refinance their debt loads, miners took advantage of rising coal prices to pay off their remaining credit. As a result, they now have very clean balance sheets, according to Pipes.

Alpha Metallurgical, for example, has a debt-to-equity ratio of 1%. Peabody's debt ratio is a scant 10%. Arch Resources weighs in with a 9% debt load. Consol's debt ratio is 30%, one of the highest in the industry.

"Coal unlike almost any other industry doesn't have debt overhang to worry about," Pipes said.

Looking forward, however, the industry is in for some earnings adjustment. Wall Street forecasts ARCH profits will fall 63% from the EPS of $63.88 in 2022 to $23.36 per share this year.

On Thursday, AMR revised its full-year outlook after it had lower-than-expected shipments in the third quarter. The company reduced its full-year 2023 metallurgical coal shipment guidance to a range of 14.8 million tons to 15.2 million tons, down from the previous range of 15 million tons to 16 million tons. AMR also increased its met coal segment cost of sales guidance to a range of $110 per ton to $113 per ton, up from the previous range of $106 per ton to $112 per ton.

Analysts had previously predicted AMR's 2023 earnings would retreat 40% from the highs of 2022, but still totaling $46.42 per share.

Consol is a glaring exception. Analyst consensus has Consol's full-year profit growing 62% to $21.16 per share.

U.S. Coal For Electricity Phasing Out

The Energy Information Administration (EIA) forecasts this year coal will fuel 16% of the electricity generated in the U.S. — behind natural gas, renewables and nuclear. In 2021, coal made up 23% of electricity generation and was responsible for more than 50% of U.S. electricity generation 15-years ago.

U.S. coal use peaked between 2005 and 2008, with more than 1 billion tons of coal burned each year, according to the EIA. Since then, as natural gas emerged as a cheaper fuel.

Meanwhile, U.S. coal exports are relatively small but rising — a key factor in the recent rally. In 2022, the U.S. exported about 85 million tons of coal to at least 71 countries. Of that, around 55% was metallurgical coal and 45% was thermal coal, according to EIA data. India was the largest buyer.

"Thermal is not so much the story of the coal sector," Pipes said. "There are a few pure plays left that are exposed to the domestic trends alone, but most are focused on exports."

Coal Stocks: U.S. Coal Exports Still Below Record

The EIA sees U.S. coal exports hitting around 98 million tons in 2023, well below the 2012 peak of more than 125 million tons. In the first half of 2023, the U.S. exported 48.7 million tons of coal, up 11% compared to 2022, according to EIA.

"Demand for metallurgical coal is primarily on the export side," Pipes said. He added the U.S. exports more than 66% of the metallurgical coal it produces.

West Virginia and Pennsylvania are the largest met coal-producing states. Wyoming is the largest source of thermal coal.

Meanwhile, the U.S. is also experiencing a boom in spending on U.S. manufacturing construction, with the largest amount of spending on new projects since the 1960s. Analysts expect this to translate into increased steel demand. Top seeds there include U.S. Steel and Nucor, the largest U.S. manufacturer of rebar steel. Steel Dynamics and Cleveland-Cliffs are also on the list.

However, a high percentage of construction grade steel in the U.S. is produced using electric arc furnaces, which do not require coking coal. The vast majority of U.S. metallurgical coal gets exported, meaning the U.S. construction boom does not suggest increased demand for coal producers.

"There are other sectors, I would say, that are more directly benefiting from onshoring or nearshoring." Pipes said. "I would say for coal, it's a benefit, but it would be really hard to pinpoint it in the numbers."

Met Coal, Exports Thwart Climate Change Clampdown

What about climate change? Pledges by companies, industries and countries to reach net-zero emissions targets suggest a world moving away from coal. And climate change legislation continues to camp down on coal power generation in the U.S.

"A lot of companies refocused on metallurgical coal with this thought that the steel sector is not going to be as impacted, or is basically just more resilient to these climate policies," Ian Lange, a professor in the Mineral and Energy Economics program at the Colorado School of Mines, told IBD.

"From 2020 to 2023, you've got kind of stable production out of coal mines, but just a real tank in the use in the U.S. of coal for power," Lange added. "Exports are making that up."

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 edged higher hitting record highs of 8.3 billion tons, according to the International Energy Agency (IEA).

Coal Stocks: Record Coal Demand In 2023

Looking ahead, worldwide coal consumption continues to gain momentum, according to the IEA's Coal Market Update published in late July.

"Global coal consumption climbed to a new all-time high in 2022 and will stay near that record level this year as strong growth in Asia for both power generation and industrial applications outpace declines in the United States and Europe," the IEA update said.

The IEA predicts small declines in coal-fired power generation in 2023 and 2024 will be offset by rises in industrial use of coal.

However, the IEA forecasts that China, India and Southeast Asian countries combined will account for 3 out of every 4 tons of coal consumed worldwide in 2023.

"Demand remains stubbornly high in Asia, even as many of those economies have significantly ramped up renewable energy sources," said IEA Director of Energy Markets and Security Keisuke Sadamori in a July press release.

Please follow Kit Norton on X, formerly known as Twitter, @KitNorton for more coverage.


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