Tuesday, February 7, 2023
HomeMarketCoal Use Hits New Record. The Stocks Are Soaring.

Coal Use Hits New Record. The Stocks Are Soaring.

Coal remains important for the production of metals like steel.

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Luke Sharrett/Bloomberg

The world is on pace to use more coal than ever this year, with demand rising above 8 billion tons for the first time ever, 1.2% above last year’s levels, according to the International Energy Agency.

Coal releases more carbon dioxide and polluting chemicals than other fuel sources, so global efforts to slow climate change and clean the air have focused on phasing coal out. But Russia’s invasion of Ukraine and a shortage of natural gas this year led several countries to rely more on coal rather than less. In addition, coal remains essential for the production of metals like steel; replacements for it will likely take a few more years to develop. The IEA expects coal use to stay at current levels through around 2025.

The growth of coal has benefited producers, whose stocks soared in 2022. The price of coal is up 70% this year. The top two U.S. producers are on track for very strong performances. Both had previously filed for bankruptcy protection in the mid-2010s, but have emerged in better shape.
Peabody Energy
(BTU) is up 151%, and
Arch Resources
(ARCH) is up 55% this year. Both are still worth less than $5 billion, indicating that investors consider the industry to be a bit player. But some analysts have been getting more bullish.

“Peabody remains positioned to continue generating significant free cash flow if strong underlying prices hold, with implementation of a shareholder return program still targeted for end of the first quarter of 2023,” wrote
BMO Financial Group
David Gagliano last month in a note increasing his price target to $31. Peabody was trading around $28 on Monday.

The larger picture for the industry next year is likely to remain mixed. Coal use for industrial applications like steelmaking is likely to fall given expectations of a global economic slowdown. But continuing high natural-gas prices could stimulate more demand for coal in electricity production.

“Coal used in electricity generation, the largest consuming sector, is expected to grow by just over 2% in 2022,” the IEA said. “By contrast, coal consumption in industry is expected to decline by over 1%, mainly driven by falling iron and steel production amid the economic crisis.”

Coal’s longer-term future looks bleak as countries around the world—including major coal users like China—expand renewable energy at a much faster rate than any other source of electricity. But coal could stick around longer than many forecasters had predicted depending on the development of replacements for its other uses.

Write to Avi Salzman at avi.salzman@barrons.com

Credit: marketwatch.com

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