[10]
Everybody is always complaining about the crash of the gold, silver and copper prices, but there’s one completely unsexy commodity which has already been forgotten by everybody. Coal.
Even though coal was (and still is!) the backbone of several large economies (USA, India, China,…), a dramatic oversupply situation has resulted in the market being flooded with thermal coal as a lot of coal companies were lured into building expensive coal mines when the coal price was trading above $100/t (see next image) but once it became clear the demand for coal wasn’t as high as expected, the price started to plummet due to an oversupply situation.
[10]
Source: Financial Times
That being said, the American coal sector got hit even harder, as not only was there pricing pressure, there was also an enormous political pressure and the coal sector was targeted by president Obama. Under his tenure, the Environmental Protection Agency wanted to force the coal-fired power plants to adhere to much stricter rules in terms of mercury and toxic air pollutants [11] from the plants. This was a huge blow to the Obama administration which had been wanting the new rule for quite a long time. This means that one of the several overhangs of the thermal coal market has now (temporarily) been removed. It might take a while before the issue gets back on the table and it could easily be pushed towards next decade as it’s not unlikely a Republican candidate will be the next president of the United States.
On top of that, there’s also some movement on the state-level. The State of California is passing a law [12] which would prohibit Calpers, a state pension fund, to have any investments in companies generating in excess of 50% of its revenues from coal mining.
So the near-term pressure is off the coal markets in the US, but let’s have a look at the damage which has already been done. Whereas the Coal ETF was trading at almost $45 just 4.5 years ago, it has fallen off a cliff ever since then.
[13]
The decline has even accelerated in the past few weeks as the ETF lost another 25%-30% of its value and more than 50% in just one year time. The Coal ETF has also entered the extremely oversold-territory, based on the RSI.
[10]
It’s safe to say that coal very likely is the most hated commodity right now and due to the lack of investor interest and huge debt loads, we expected several of the US-based coal mastodonts to go under. This will result in some opportunities in the market as several mining companies will no longer be able to afford to keep their mines open, only to sell the coal at a loss. Some companies are now desperate to sell assets, and Peabody Energy recently sold an Australian mine after a 3.5 year sale process. It originally wanted to fetch in excess of $500M for the asset. But what was the final sale price? $20M.
It doesn’t happen very often to see these type of fire-sales in the mining sector, and it’s waiting for a tipping point. Nobody cares about coal right now; we even approached several bankers in commodity-oriented countries but none of them could get their hands on any recent research on the coal sector in general. Coal is a forgotten commodity but remains very vital as a commodity, especially in developing nations that are still relying on thermal coal as an important source to generate electrical power. The demand is expected to continue to grow, as can be seen on the next image:
[10]
Source: Financial Times
When blood is flowing in the streets, it’s the best time to buy. Some companies won’t survive the current coal downturn, but those who do will stand to reap the rewards once the momentum turns.
King Coal is dead, long live the king!
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