Coal can’t revel in its regulatory dodge
U.S. coal miners dodged a bullet when Congress ditched cap-and-trade regulation. But they may still be vulnerable. Carbon tax or not, many geriatric coal generators are heading for retirement. And demand from China may not be the silver bullet investors expect.
There’s no denying that a price on carbon would have been grim news. For the first time in years, once-pricey natural gas had been giving cheap coal a run for its money, leading some electric producers to switch to gas. Even a small nudge from a cap-and-trade system could have accelerated the switch to the cleaner burning fuel. Small wonder then that the likes of Peabody and Walter Energy have outperformed the S&P 500 Index by close to 10 percent since lawmakers abandoned the cap-and-trade idea at the end of July.
Yet there are other problems over which to fret. Many of the country’s coal-powered electricity plants have been around since the Eisenhower administration. With the environmental lobby blocking a new generation of coal plants, around 10 percent of this capacity will disappear soon, robbing miners of precious clients. Nor is the White House likely to let the industry off the hook. It will try to curb greenhouse gas emissions through the Environmental Protection Agency.
Salvation may lie overseas. Demand is indeed galloping in China and India. Metallurgical coal used in steel making is particularly sought after. Yet with Europe cutting back sharply, coal demand worldwide is only expected to increase by 1.1 percent a year through 2020, according to the U.S. Department of Energy. Even the international trade in coal may peak by 2015 as China and India ramp up domestic production. After all, China sits on 15 percent of global coal reserves.
Justifying the industry’s relatively rich valuations is tough. They trade on average at an enterprise value of about 6.6 times EBITDA, according to Simmons & Co. That’s a premium to independent oil and gas. The reveling over the demise of cap-and-trade could end with a painful hangover.