You’d be forgiven for not buying the dip in this market.
Most investors assumed it was just the new norm for this commodity to be painfully cheap. But I suppose the coal bulls out there — there must be some left, right? — are having a laugh at the rest of us this week.
Now, I don’t mean to knock anyone’s moneymaking strategy, as long as it’s actually making money. But it’s still hard to see a reason to go long on coal.
The problem is that most of the world is just giving up on it. Even its biggest supporters in China are cutting coal use in favor of cleaner energy alternatives.
There’s only one place where coal isn’t destined to die out: industrial processing. For the most part, that means steel production.
This calls for a specific kind of low-ash, low-sulfur coal known as coking or metallurgical coal. And this kind of coal has had a stellar 2016.
Since February, coking coal coming out of Australia has seen its price more than double to $158 per tonne. It rose 12% in just the last few weeks, and it’s expected to maintain those gains…
So long as China keeps them up.
See, this rally wasn’t spurred by an increase in demand, or really any regular market movement. China has actively been cutting domestic supply this year by restricting how much its coal miners are allowed to work. This was just to keep those mines from shutting down due to low prices, mind you.
So for the optimistic among you thinking this was the coal rally you’ve been waiting for, I would take your gains now and run.
Sinking Ships
According to the International Energy Agency, coal accounts for roughly 40% of electricity production as of 2015, meaning the world is still pretty reliant on it.
But that number is expected to drop to just 29% by 2040.
Estimates from the Energy Information Administration show that coal is the only major energy production method that’s expected to nearly flatline in the next few decades.
The past five years have sent the price of coal into a free fall from a high of $139 to a low of $48. With the last few months’ rally, coal stands at $69.
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But that rally isn’t expected to stick around for very long. In the meantime, many producers are still losing money, shutting down mines, or even shutting down entirely. The U.S.’s two biggest companies, Peabody Energy and Arch Coal, filed for bankruptcy within the last year, and those left aren’t in much better shape.
The EIA estimates that even though global coal consumption will rise, international trade will dwindle as domestic production comes back online.
Coal is doomed. Plain and simple.
A Bigger Boat
The main thing coal bulls will argue is that it’s lasted this long because it is so reliable and so cheap. And they’re right!
Yet coal is still sliding. What gives?
Without a doubt, coal is being taken down from all sides. In the short term, another hard-hit commodity will be taking its place: natural gas.
It’s more popular than nuclear for now, and certainly more reliable than today’s renewables. Already, natural gas use has surpassed coal in the U.S., and it’s gaining in China as you read this. You can see on the chart above just how fast it’s expected to climb.
You can run with this coal rally for the next few months, maybe. But beyond that, natural gas investments will be the stronger long-term play for energy investors.
Until next time,
Megan Dailey
Energy and Capital
