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Is This One Energy ETF You Need to Sell?

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Coal as a commodity witnessed a sluggish 2013, to put it mildly, with the sole play on the global coal industry – Market Vectors Coal ETF (KOL) – shedding about 25%. A stringent environment protection act in America, resurgence of alternative energy sources, supply glut and sluggish demand from emerging markets, cast a cloud over the sector ETF.

With the U.S. climate plan being sterner and energy prices climbing the pricing ladder in the wake of Iraq tension, let’s see what’s in store for this ETF in the coming days (read: Is the Coal ETF Ready for a Rebound?).

New Move in Climate Change Act

President Obama has come up with a new move in its environmental plan in early June which speaks of an astounding aim of one-third greenhouse-emission reduction over the coming 15 years. The plan was mainly intended to lower pollution from coal-fired power plants, the main reason for the nation’s carbon emissions.

The plan calls for a 30% drop in carbon emissions by 2030 compared with the 2005 levels in a move to curb global warming. While Obama wanted the states to put forward their plans by June 2016, the new draft reveals an extension to 2017 and 2018 for states willing to join the clean energy drive (read: What is Behind the Recent Clean Energy ETF Surge?).

The tightening in carbon-emission limits in a way could make existing and upcoming coal-fired units more expensive and less attractive for operators. Utilities are shifting their mode of power generation from coal-fired electricity plants to natural gas and alternate energy sources (read: Coal ETF in Focus on Sluggish Earnings).

Many coal-fired plants were already on their death bed as such thanks to muted natural gas prices, move from carbon to renewables and sluggish demand for electricity. This February, the U.S. Energy Information Administration (EIA) predicted that a total of 60 gigawatts (GW) of capacity will be closed by the end of the decade. U.S. coal-fired capacity will reduce to 262 gigawatts in 2040 from 310 gigawatts in 2012, as per EIA.

Is There Any Hope?

While the Obama administration looks to apply this new law, the plan has been criticized by the Republicans, some states and several individuals in the energy industry. With the U.S. due for a presidential election in 2016, the plan appears vulnerable to the results.  If a Republican president is voted in for 2016, the execution of the law can probably be stopped.
Secondly, as per EPA, coal will still be used to produce 30% of U.S. electricity by 2030 compared with 39% in 2013, even if the new regulation is brought into play.  Usage of coal for the nation’s energy generation will drop to about 33% in 2020 and 30—31% in 2030 under the planned limitations, compared with 41% under existing rules, per the EPA numbers.
Also, whenever natural gas prices soar in events like a harsh cold snap which the U.S. witnessed this year, operators turn their focus to coal. China – the largest user of coal across the globe – has been stabilizing as evident by the recent rise in the manufacturing numbers. However, this nation too is concentrating on building a greener environment.
The Chinese share of coal consumption will likely be reduced to 65% this year from 69% in 2011. However, the reduced share is also quite high to keep the coal sector afloat.
Iraq tension can also act as a short-term catalyst to the global coal industry. Unrest in this oil-risk nation has pushed up the prices for oil and natural gas thus causing many to turn toward the coal space for energy generation purposes (read: Is This the Year for the Coal ETF?).

Bottom Line
Though the coal ETF looks a clear bear or ‘sell’ candidate over the long term with a high risk outlook, investors with an extremely strong stomach for risks can try out this product with a short-term notion.
The coal ETF gained about 4% in the last three-month period (as of June 20, 2014) though it lost about 3.65% year-to-date. The coal ETF’s short-term moving average (9 days) is above the 50-day moving average and it is presently residing in the oversold territory, suggesting a short term pop is possible, though the longer term picture is still quite weak.
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