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Coal Miners’ Monster Rally Fizzles As New Disruptions Arise

To say the past 2.5 years have been great for coal stocks would be an understatement. After hitting a bottom in January 2016, the VanEck Vectors Coal ETF (KOL) which invests in publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry has risen a whopping 200%. But, those spectacular gains may be behind us as new clouds form on the horizon. Indeed, since our September 26, 2017 DIBs report titled PEAK COAL ON THE HORIZON, where we discussed the fact that global coal consumption was approaching a tipping point, the sector’s performance has been in line with that of the broad U.S. equity market. And coal’s tipping point seems closer than ever, assisted along by three new factors which MRP will outline below.

In a clear message that coal is soon past its heyday, insurance giants such as Allianz, Dai-ichi Life, and Swiss Re are beginning to eliminate coverage for coal-dependent companies. Swiss Re, for example, has enacted a policy that refuses to cover any firm that derives 30% or more of its revenue from coal power, or that uses at least 30% coal power to run its operations. This move is not just about Swiss Re’s promised support of the Paris Climate Accord, but also about its bottom line. The rationale is that, if lower emissions help to mitigate risks arising from climate change and pollution, the insurance giant is less likely to have to pay out disaster claims. It therefore behooves insurers to force businesses to switch out of fossil fuels if those businesses want to remain insured.

Institutional investors too are adopting such tactics. Norway’s $1 trillion sovereign wealth fund is divesting itself of the securities of companies that get more than 30% of their business from coal.

The second shift is manifesting itself across developed economies where coal, once the dominant generator of energy, is ceding market share at an accelerating pace.

In Europe, for example, the transition from fossil fuels hit an important milestone during the first half of 2018 when renewables finally beat coal to become the single largest power source in Germany, the EU’s largest economy. Wind, solar, and other renewable energy sources together generated 118 billion kilowatt hours (kWh) of electricity between January and the end of June, compared to 114 billion kWh generated from lignite and hard coal over the same period. Renewables’ share in the power mix increased from 32.5% to 36.3%, coal’s share dropped from 38.5% to 35.1%, while natural gas and nuclear each contributed 12.3% and 11.3% respectively. The German government has pledged to increase the share of renewables in power consumption to 65% by 2030.

Even in countries like Poland, where 90% of electricity generation was powered by coal just 12 years ago, coal’s share has dropped to 78% and continues to trend downwards as clean energy sources and natural gas are increasingly being used to meet the rising demand for energy nationwide.

The third disruption is a burgeoning trade war that could alter the global flow of coal imports & exports.

America’s domestic market for coal is at a 40-year low, and closures of coal-fired power plants continue apace, with 27 plants shutting down in 2017 alone. By contrast, international demand remains robust as some countries continue to favor cheap coal to fuel their manufacturing activities. The trifecta effect of increased foreign demand, U.S. coal’s competitiveness on global markets, and President Trump’s deregulatory policies boosted U.S. exports by 60% last year to 97 million tons.

However, the biggest outside markets for American coal also happen to be those that have been targeted by Trump’s tariffs on U.S. steel imports: Brazil, Japan, Ukraine, Canada, India, South Korea and China. If these countries were to slash their U.S. orders to retaliate against Trump’s tariffs, the reduction in demand would be painful for U.S. miners. Together, China, Japan, India, and Turkey represent at least a quarter of America’s metallurgical coal sold overseas. China has already threatened to punish U.S. coal producers if Trump continues to levy additional taxes on Chinese goods.

Even without these trade war headwinds, it is already difficult for Trump to fulfill his campaign pledge of saving the U.S. coal industry. He has indicated a willingness to invoke the rarely used authority of the Federal Power Act (FPA) and, if need be, the Defense Production Act (DPA) to keep coal plants in operation on grounds that closing them would present a national security emergency.

But many of the intended beneficiaries of the FPA and DPA rescue strategy are aging plants that are inefficient and out of compliance with federal pollution standards. Because it is expensive to upgrade these plants with new pollution controls, especially at a time when coal is becoming less and less competitive with other forms of energy, many plants are choosing to shut down rather than undertake the investment. Consequently, the amount of coal-fired power dispatched to the grid is shrinking every year. Going forward, we can expect to see more and more zombie coal plants across the United States, especially if international demand is curtailed due to trade disputes.

Investors seeking long or short exposure to the coal industry can gain such exposure via the VanEck Vectors Coal ETF (KOL). The fund tracks the Stowe Coal Index, which invests in publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. After enjoying a couple of booming years, KOL has begun to stall. Over the past six months, it is down 8% versus the S&P’s 1% gain.

We’ve also summarized the following articles related to this topic…

 

Coal: Insurance giant stops covering firms that depend on coal 

Insurance giant Swiss Re has enacted a policy that refuses coverage to any company that either generates 30 percent or more of its revenue from coal power, or uses at least 30 percent coal power to run its operations.

The insurer noted that it’s trying to “minimize sustainability risks.” Lower emissions and renewable energy are simply better for its business — it’s less likely to pay out if it keeps climate change and pollution (not to mention use of finite resources) in check. Likewise, it sees investing in solar and wind power as ways of driving down its risks.

Insurers like Allianz and Dai-ichi Life Insurance have also dropped support for coal-dependent clients. However, this latest move could increase the pressure on companies to ditch fossil fuels even if they don’t see the environmental benefit. If they want insurance, they might not have much of a choice. Engadget

 

Coal: China Is Swallowing A Bitter Pill And Trying To Cut Its Coal Use 

The smog is so bad in China that it has covered cities while disrupting airline flights and seaport operations, all of which has upended daily lives and business. Part of the issue is the current over-reliance on coal. China has instituted a three-year action to limit pollution levels, with Shanxi and Shaanxi becoming the latest two provinces to be enlisted, reports Reuters. They produce more than 900 million tons of coal a year, or a quarter of the country’s total while also being a major developer of gas and petrochemicals, the story adds. That region is second only to Beijing-Tianjin-Hebei.

Thermal power, steel, petrochemicals, non-ferrous metals and cement makers will be compelled to comply with at least 25 new emissions standards by October. Coking coal, or that coal used to make steel, will have an additional year to comply. The Chinese Ministry of Environment has been sending inspectors to provinces around the country and have charged 80,000 factories with criminal offenses.

Key to the effort is China’s commitment to reduce its reliance on coal ― now at 66% of its electric generation portfolio. Its immediate aim, however, is to reduce that percentage to 59% and to increase the use of natural gas to 7.5%. Sustainable energy, meanwhile, is on track to rise from 10% of the country’s electricity mix today to 15% in 2020 and by 2050, it will be 30%. Hydropower is second only to coal in terms of electricity generation. Forbes

 

Coal: Zombie Coal Plants Show Why Trump’s Emergency Plan Is No Cure-All 

Two outdated coal-fired power plants In Yorktown, the Yorktown 1 and 2 units operated by Dominion Energy, are limping along in the Virginia heat. Inefficient, uncompetitive, and out of compliance with federal pollution standards, and long slated for retirement, Yorktown is the only generating station in the country where power is being supplied by coal plants on an emergency basis to preserve the grid’s reliability.

But that could happen at many more if the Trump administration gets its way and invokes the FPA and another law, the Defense Production Act, to keep old coal and nuclear plants in operation on grounds that closing them would present a national security emergency.

To nobody’s surprise, heat waves like the one that has gripped much of the country in early July caused electric demand to spike. It reached 44,557 megawatts across PJM’s eastern power market on June 3, the highest since last August. Whatever the pollution consequences, it has proven dicey to treat these plants as a reliable source of power. Both units operated all right in May. But in early June, one of them “suffered an unexpected failure of a critical component,” Dominion reported. It could no longer operate. The second generator was kept working, off and on.

Only when demand spikes during extreme weather are they able to meet market prices, and the amount of their capacity actually dispatched to the grid shrank from 47 percent in 2007 to 10 percent in 2017. ICN

 

Coal: Renewables overtake coal as Germany’s most important power source 

Wind and solar power, together with other renewable sources, have overtaken coal as Germany’s most important power source.

Wind, solar, and other renewable energy sources together generated 118 billion kilowatt hours (kWh) of electricity between January and the end of June, compared to 114 kilowatt hours generated from lignite and hard coal over the same period.

Germany still lacks a reliable backup system for periods of low renewable energy output, this problem is set to intensify as more coal plants are shut down. In addition, the country’s last nuclear power plant is scheduled for decommissioning in 2022.

The BDEW estimates that renewable energy sources increased their output by ten percent between the first half of 2017 and the same period one year later, raising their share in the power mix from 32.5 percent to 36.3 percent in 2018. CleanEnergyWire

 

Coal: Trump’s Trade War Is Digging The Coal Industry Into A Hole

Although Trump’s policies have helped boost U.S. coal exports, increasing overseas sales by 60% last year to 97 million tons, there’s no ignoring the fact that America’s domestic market for coal is declining. The sector’s output hovers at its lowest level in 40 years, with additional plants shutting down each year. By contrast, international demand for coal for use in power plants and steelmaking is still strong.

The biggest markets for American coal, however, are those that have been targeted by Trump’s tariffs on U.S. steel imports: Brazil, Japan, Ukraine, Canada, India, South Korea and China. If these countries slash their U.S. orders in retaliation for the tariffs, any reduction in demand could have serious consequences for America’s producers. China, Japan, India, and Turkey together bought almost 14 million tons of metallurgical coal from America in 2017, a quarter of its overseas total. China has already threatened to punish the U.S. on coal if Trump continues moving ahead with tariffs on Chinese goods.

Other markets offer potential for US exports, especially in Southeast Asia, which still has a relatively high demand for coal, but many of those countries could well be spooked by the prospects of a trade war. The opportunities for competitive exports – a result of reduced environmental regulations combined with robust international demand – have opened up new global markets. But major trade disagreements could overturn America’s advantage, reducing its market share in every continent. Federalist

 

Sand: Worthless Just Two Years Ago, West Texas Sand Now Brings in Billions

Hi-Crush Partners will mine and ship some 22 million tons of sand this year to shale drillers all around them in the Permian Basin, the hottest oil patch on Earth. It is a staggering sum of sand, equal to almost a quarter of total U.S. supply. And within a couple years, industry experts say, the figure could climb to over 50 million tons.

As drillers piled into the region, they began to wonder if they really needed to have sand shipped some 1,300 miles by rail from Wisconsin when they had this inferior, but serviceable, stuff lying all around them. Shipping costs from Wisconsin come to about $90 per ton of sand. That’s triple the $25 or so it costs to truck in the Texas sand.

Today, sand fetches $80 a ton, making this year’s haul alone worth about $2 billion. With such explosive growth, of course, comes the risk of over-expansion. This concern is clearly visible in the stock market. Shares of Hi-Crush are down more than 10 percent since mid-May. So too are those of U.S. Silica Holdings and Emerge Energy Services. And Covia Holdings, a new company formed in a merger of two sand powerhouses, has slumped 27 percent since it began trading last month. B