It's Time to Abandon Coal Stocks
Apr 5th 2012 10:22AM
Updated Apr 5th 2012 10:24AM
Coal has been one of the most important sources of energy for the U.S. since the invention of electricity. It's cheap, abundant, and it's supported millions of jobs over the years. But everything must come to an end, and coal's best days may be behind it.
The U.S. Energy Information Administration estimates show that coal consumption will drop this year to levels not seen since 1996. The party is coming to an end and coal's reign as prom queen is over.
Natural gas driving the change
Cheap natural gas has been the driver of our reduced use of coal, a trend that will likely continue because the U.S. has an abundant supply of natural gas and plenty of drillers to find it. The natural gas boom in the U.S. is also leading China and Europe, two major coal importers, to look into fracking for energy. That could put a damper on the hope for growing exports.
Patriot Coal (NYS: PCX) , Alpha Natural Resources (NYS: ANR) , and Peabody Energy (NYS: BTU) have hoped that a pickup in economic activity in the U.S. and growth in China would fill demand in coming years. It doesn't appear that either demand source will raise these companies from the doldrums, and both countries are looking to energy sources other than coal in the future, muting demand growth in the U.S. and in China.
Arch Coal (NYS: ACI) hoped for "a multi-year upswing in the coal market" that has failed to keep its stock from tumbling. Coal is still responsible for a significant portion of our energy generation, around 40%, but newer, cleaner, cheaper alternatives will continue to put downward pressure on its use.
Renewable energy is the next threat
So far, the impact renewable energy has had on the grid has been small. There just hasn't been enough wind, solar, or biomass to make coal or natural gas tremble. But that's about to change.
Wind's base has grown considerably in the last decade and it will continue to play an increasing role in coming years. Solar has reached grid parity in parts of the U.S. and grew more than 100% in 2011. Solar's small base will soon become a significant portion of our electricity infrastructure and continue to put pressure on coal demand.
In China, where investors have placed a lot of hope for coal, they expect to install at least 4 GW of solar in 2012, reducing the demand for U.S. imports.
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At the time this article was published Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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