Coal Prices Keep Rising – Can You Harness Them? – December 7, 2021
Coal is not a space where people would want to invest their money for the long term as countries all over the world are working for a cleaner future which of course means no coal. Significantly, the change will not happen overnight.
So as capacity will continue to be reduced, there will be a gap in consumption until clean energy can close that gap. This is no easy task considering the fact that the world population continues to increase and the modern growth economy requires a continuous increase in production and consumption.
Coal is therefore essentially a market where supply will continue to tighten as companies downsize. In contrast, demand will be relatively inelastic and dependent on the amount of alternative energy available to fill the void. In addition, the lack of long-term prospects means an absence of new entrants to increase competition and thus control prices. As a result, coal prices are expected to remain relatively high.
Coal has two main uses. The first is its use in blast furnaces that smelt iron ore and other components. It is part of the steel production process. Other metals can also be melted this way. This use case is called metallurgical coal.
The other use of coal is in power plants for power generation and it is called thermal coal.
Over 90% of the coal produced in the United States is used in thermal power plants. And that’s where we have a tense situation this year. A number of factors, linked to events all over the world, have contributed to the seal.
In Europe mainly and also in the United States, the summer was particularly hot, which increased electricity consumption and reduced energy stocks (oil, coal, natural gas and wind power). Production has not kept pace, mainly because the post-pandemic increase in production has not allowed it.
The two largest coal producers, China and India, were also rebounding from the pandemic, increasing demand. At the same time, China, the world’s largest producer and consumer of fuel, has introduced reforms limiting the production of small miners for safety reasons. Indonesia, the largest exporter, experienced production disruptions due to heavy rains, then the government temporarily suspended exports from 34 suppliers for failure to meet national obligations.
Australia’s second-largest coal producer cut capacity and staff during the pandemic and was in no rush to add. All of this added to a situation where the already declining coal supply was further affected by various factors, even as demand increased dramatically.
So, while this market may not be attractive for long-term investment, it seems extremely unlikely that demand for coal will completely melt in the next decade. Even if the domestic market is weakening due to an abundant supply of alternatives (which does not seem likely at all before this time), demand from Asian countries will take longer to decline.
In the meantime, this is a segment of the market that is expected to benefit from sustained price increases (Central and Northern Appalachian coal prices have risen by $ 2.75 and $ 2.20 respectively from estimates. of last week’s EIA).
Two stocks that stand out here are Yanzhou Coal Mining (YZCAY – Free report) and SunCoke Energy (SXC – Free report). Arch Resources (CAMBER – Free Report) and Warrior Met Coal (HCC – Free Report) also look great, although they currently have a # 3 rating. Let’s take a closer look-
Resources of the Ark
One of the largest coal producers in the United States, Arch Resources operates nine mines in major coalfields across the country. At the end of 2020, the company had 886.4 million tonnes of recoverable coal reserves.
After increasing revenue by 49.4% this year, Arch Resources is expected to grow a further 23.7% in 2022. Profit growth in 2022 is expected to be 93.5%, on top of growth of 191, 5% this year. So, you can clearly see the effect of these rising prices on revenue, margins and profits.
The 2022 estimate is up $ 6.47 (19.2%) over the past 30 days. They have steadily increased over the past 90 days.
Arch Resources is currently trading at 2.16X, which is well below its median of 8.35X over the past year, as well as the 21.19X of the S&P 500. So stocks appear to be worth considering .
The warrior met coal
Warrior Met Coal produces and exports premium metallurgical coal. It operates primarily in Alabama.
Warrior’s revenue for 2021 and 2022 is expected to increase by 35.9% and 24.1% respectively. Its profits over the two years are expected to increase by 367.7% and 240.9%, respectively.
Zacks’ consensus estimate for Warrior’s earnings in 2022 has jumped $ 1.82 (41.5%) in the past 30 days. Estimates have increased steadily over the past 90 days.
Warrior is trading at 3.79X earnings, below its median level of 9.94X over the past year, which makes stocks really cheap.
Yanzhou Coal Mine
Yanzhou extracts premium, low sulfur coal from its mines in Shandong Province, China, and is one of the largest producers and exporters of coal in China. Based on the coal output per production employee, the company is one of the most efficient underground coal mining enterprises in China.
Based on the estimates of a single analyst, Yanzhou will increase its revenue by 146.0% this year, but will experience a decline of 25.7% next year. It is still early to start estimating 2022 sales, especially since there is only one analyst providing estimates. However, it should be noted that the trend of revisions of the estimates is encouraging. As a result, the 2022 estimate has increased by 32 cents (10.3%) in the past 60 days.
Yanzhou is trading at 5.09X earnings, above its median level of 4.74X and annual high of 6.90X. Further upside may be possible, especially given the upward trajectory of earnings estimates.
SunCoke produces metallurgical coke at its facilities in the United States and Brazil.
Analysts currently expect its revenue and earnings growth to decline in 2022. But we’ll have to wait and see, given the positive dynamics in the industry.
At 11.36X earnings, SunCoke shares look cheap compared to their median of 12.56X over the past year and also to the S&P 500.
Price movement over 3 months
Image source: Zacks Investment Research