Coal Industry Poised to Benefit from Trump's Accommodations

Coal usage and its importance as a source of fuel have dropped considerably over the years due to the combined impact of stringent regulation, cheap natural gas and alternate sources to generate electricity. However, thanks to President Trump, coal is set to regain some of its lost glory.

Most energy analysts downplay coal as a fuel source and are quite skeptical about its  prospects. However, Trump can prove to be a game changer for the coal industry with his promised relaxation of emissions rules.

Apart from the relaxation of stringent environment legislation, coal demand also benefited from the higher price of natural gas and improvement of coal prices in the global market. Increase in steel production from Asian countries like China and Japan will pave the way for shipment of metallurgical coal.

Per a report from the World Coal Association, there are currently 861 billion tons of proven coal reserves worldwide, implying that there is enough coal to last nearly 112 years at the current rates of production. In comparison with this, proven oil and gas reserves are predicted to last around 46 and 54 years, respectively, at the current production levels.

The current availability of coal even outpaces the combined proven reserves of oil and gas. So the advantages of coal cannot be overlooked and will definitely brighten the long-term prospects of investors.

Trump's decision to walk out from the Paris Climate Agreement and repeal the Clean Power Plan should keep fossil fuel-based electricity generation afloat longer than expected.. Also, the recent Supreme Court ruling temporarily halted the implementation of the Clean Power Plan.

Let's dig a little deeper into the factors driving this industry.

Coal Dominates U.S. Power Generation: Coal is still among the major sources of fuel for generation of electricity in U.S. Per the U.S. Energy Information Administration EIA, total U.S. coal consumption will remain unchanged this year at 729.3 million short tons (MMst) from the 2016 level and will increase to 744.2 MMst in 2018.

Apart from an increase in consumption of coal in electricity production, EIA forecasts prices of coal to gradually increase for electric production. The price of coal per million Btu is anticipated to increase from $2.13 per million Btu in 2016 to $2.67 per million Btu in 2017 and $2.22 per million Btu in 2018.

Not Just Electricity Generation: Electricity generation is just one use of coal in the U.S. Manufacturing plants and industries use coal to make chemicals, cement, paper, ceramics and metal products, to name a few. Methanol and ethylene, which can be prepared from coal gas, are used to make products such as plastics, medicines, fertilizers and tar.

Certain industries consume large amounts of coal. For example, concrete and paper companies burn coal, and the steel industry uses coke and coal by-products to make steel for bridges, buildings and automobiles. Per EIA consumption of coal in other sectors is expected to increase year over year in 2017 by 1.2 MMst tons to 53.7 MMst tons. Usage is expected to improve further in 2018 to 55.8 MMst tons.

Coal as Input for Steel Industry: Due to its heat-producing nature, hard coal (metallurgical or coking coal) forms a key ingredient in the production of steel. Nearly 70% of global steel production depends on coal. Since "met coal" is an essential ingredient for the production of steel, U.S. met-coal producers are likely to benefit from the increase in steel consumption.

Although the steel industry is expected to remain under pressure for some time, it is certainly expected to grow on the back of flourishing automotive and construction industries. A recent report by The World Steel Association predicts global steel demand to increase 1.3% to 1,535.2 Mt in 2017 and another 0.9% to 1,548.5 Mt in 2018. This definitely is a ray of hope for metallurgical coal producers and will boost prospects of metallurgical coal producers like Arch Coal Inc. (ARCH).

Demand Upsurge in Asian Countries: The increasing demand for coal in Asian economies like China and India has been a key price driver since the end of recession in 2009. We expect this trend to continue in the future, primarily owing to rising energy needs in India, China and Southeast Asian countries.

Though Asian countries also produce coal, it does not suffice to meet the growing demand in the region, resulting in regular imports. Southeast Asia has a surging demand for electricity chiefly due to their improving economies. Numerous coal-based power plants are presently under construction and more are being planned over the next few years. This will create ample export opportunities for the U.S. thermal coal producers.

MLP and Diversification: Coal-based MLPs might be a mitigating element for the ailing coal industry. One such instance is CONSOL Energy (CNX) creating CNX Coal Resources LP (CNXC), which currently carries a Zacks Rank #3 (Hold). Coal companies are also resorting to diversification and are on the lookout for other sources of revenue besides coal. CONSOL Energy for the past couple of years has been expanding its natural gas portfolio and lowering coal operation.

To Sum Up

Interestingly, among all other coal companies, Alliance Holdings GP, L.P. (AHGP) having a Zacks Rank #2 (Buy) and Alliance Resource Partners, L.P. (ARLP) having a Zacks Rank #3 seem to be operating on a different level.  Both partnerships surpassed earnings estimates in three out of the last four quarters. Their performance is particularly noteworthy since most of the big names in the space were trying to survive in the same period. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

The importance of coal in the fuel source chain is far from over. For the aggressively growing and energy-hungry Asian economies, coal seems to be the most popular source of power generation, despite inroads being made by renewables.

Coal is by far the most stable source of energy. The majority of the coal consumed in the U.S. is actually produced in America, and the coal industry provides jobs to thousands of Americans. The "America First" approach of President Trump will help coal stocks to bounce back.

Even with the closing down of coal-fired units, coal production and consumption are set to increase in 2017 and 2018 in the U.S. This is testimony to the fact that coal will continue to be utilized in electricity generation for the foreseeable future despite increasingly stringent emission control regulations. This surely makes it a good long-term investment.

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