By HCB Investment Management The decline of the coal production sector has continued unabated in 2015. Peabody Energy Corporation (BTU), which has been the largest coal producer in the United States during recent years, has seen its stock price beaten down this year. Other prominent producers such as Alpha Natural Resources (ANR) and Arch Coal (ACI) have fared worse. Patriot Coal (PATCA) filed for bankruptcy in May, less than 3 years after a previous bankruptcy filing.
Coal Industry Blues
Underlying coal prices have also been weak. The so-called prompt month Central Appalachian coal futures contract has declined 8 percent during the first five months of 2015, while the Powder River Basin contract dropped 18 percent. In a development that reflects the declining interest in coal, the CME Group (CME) indicated in May it would be discontinuing the Central Appalachian futures contract beyond December 2016 due to a lack of liquidity. While coal will continue to trade on the wholesale markets, the scheduled discontinuation of this long time coal futures contract is emblematic of the malaise in the sector.
The factors driving down the coal sector are well documented. There is broad scientific consensus that carbon emissions drive global warming, and governments around the world, including the United States, are incentivizing power generators to lower their emissions. This has created quite a bit of regulatory bias against coal-fired generation. In addition, rapid advances in natural gas extraction techniques have made the production of vast reserves of shale gas economically viable.
Natural gas prices have fallen, and the cost of gas-fired generation has become very competitive with coal-fired generation, and created further incentive to move away from coal.