Coal should have been one of the most obvious beneficiaries of the Trump trade. But investors looking to cash in on the president’s pledge to rejuvenate the coal industry didn’t have many places to put their money. Until now.
The reason for the lack of options is that much of the U.S. coal industry was in bankruptcy when Mr. Trump took office. The three largest components of the Market Vectors Coal ETF are a Chinese miner, an Australian freight carrier and an Indonesian heavy equipment company.
The coal industry is now emerging from its darkest period, giving investors more options. The companies are returning to the markets as fundamentals are moving in their favor, a more important factor than Mr. Trump’s cuts in regulations.
The two largest U.S. coal producers, Arch Coal and Peabody Energy, have left bankruptcy. Peabody relisted last week, the same day that another company, Warrior Met Coal, filed for an initial public offering, mentioning Mr. Trump several times in its prospectus. It owns the former assets of the bankrupt Walter Energy.
The industry that has returned is a shadow of its former self. Coal production in 2008 was nearly 1.2 billion short tons and last year it was just 739 million, down 18% from 2015 and the lowest since 1978, according to the Energy Information Administration. Last year natural gas overtook coal’s share of U.S. power generation for the first time ever, and renewables also have gained at coal’s expense.
Yet there are reasons for hope. Companies shorn of billions in debt can make money today and possibly a good deal more in the future. The key is the price of U.S. natural gas. Last April front-month futures were below $2.00 a million British thermal units and Friday morning they fetched $3.33 a million British thermal units.
Arch Coal reckons that at prices above $3.00, coal from the Powder River Basin in Montana and Wyoming, where they and Peabody have enormous reserves, is competitive with natural gas almost anywhere in the contiguous 48 states. The EIA predicts output in the region will rise by nearly 9% next year.
Then there is metallurgical coal for steelmaking, a smaller but more lucrative category centered in Appalachia. Floods in Australia have cut supply, forcing customers to turn to U.S. producers to fill the void. Though output is declining, mines in the region are mostly competitive and profitable.
Coal is in a deep hole, but savvy investors can see daylight.
Corrections & Amplifications Peabody Energy relisted last week An earlier version of this article incorrectly stated Arch did. (April 9, 2017)
Write to Spencer Jakab at firstname.lastname@example.org
More From The Wall Street Journal