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Is It Too Late for the Struggling Coal Industry?

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The coal industry remains beleaguered, with challenges from all quarters domestic and international. In the U.S., strong competition from natural gas, 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.

Higher coal producing countries like Australia and Indonesia, and, importantly, a stronger greenback, are making the export market fiercely competitive for the U.S. coal players.

Even without the Clean Power Plan, utilities like NextEra Energy (NEE - Free Report) and Dominion Resources (D - Free Report) were already investing hugely to create a green energy generation portfolio, and have enhanced their focus on electricity from clean fuel sources.

The Clean Power Plan has been repealed by President Trump. Even still, new investments are being directed toward natural gas and renewable-based power production due to the clean-burning nature 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. Companies like Patriot Coal and Walter Energy 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 Trump administration is trying to ease regulations that are hurting the coal industry. Will the U.S. be able to work in isolation ignoring the emission agreements directed at benefiting everyone?  The answer to this question actually holds the key to the coal industry’s prospects.

American Electric Power Co., Inc. (AEP - Free Report) , a Zacks Rank #3 (Hold) stock, has eliminated over 5,500 megawatts (MW) of coal-fired capacity from its generation portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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. Usage of alternate energy is on the rise, with more utility-scale solar projects being commissioned across the country.

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.

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 online nearly 2,800–5,400 MW of new wind projects over the 2017–2018 timeframe.

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.

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 Industry Poised to Benefit from Trump’s Accommodationswe focused on factors that can drive the industry forward.

Even though President Trump has taken steps to boost the prospects of 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 for policy makers whether it will be feasible to revive the coal industry in the long run. Carbon emissions are a serious threat to the future of the planet, according to a vast majority of climate scientists.

A recent release from Energy Trend Tracker indicates that 24 coal fired production units in 14 power plants producing 6,989 MW of energy is lined up for closure in 2017.

At present, we will advise investors to stay away from Natural Resource Partners LP (NRP - Free Report) which not only carries a Zacks Rank #5 (Strong Sell), but has also delivered negative earnings surprises in two of the trailing four quarters. Additionally, its 2017 estimates have gone down by 40.4% in the last 30 days to $3.54 per share.

To overcome difficulties 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 likely to down over the long term.

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