Supreme Court Ruling Offers The Coal Industry Short-Lived Benefits

|
Includes: AHGP, ANRZQ, BTU
by: Simple Investment Ideas

Summary

The Supreme Court recently ruled against the EPA's emissions regulations, causing coal stocks to spike momentarily.

This ruling distracts from the bigger picture of an overall industry decline, evident in the rise of cleaner alternatives, the increasing societal pushback, and the shifting energy infrastructures.

The downward spiral of coal company valuations will likely continue given the mounting pressures against coal.

The coal industry has been hit with many detrimental rulings over the past few years. Most notable among these has been the Obama-backed EPA regulation calling to reduce carbon emissions 30% by 2030. This sole proposal has devastated coal companies, contributing enormously to the precipitous decline of major coal stock valuations over the past few years, including the likes Alpha Natural Resources (ANR), Alliance Holdings (NASDAQ:AHGP), Peabody Energy Corporation (NYSE:BTU), etc. Recently, however, the coal industry has been hit with positive concerning the aforementioned EPA regulation.

The Supreme Court blocked this ambitious EPA regulation, with Justice Scalia stating that "One would not say that it is even rational, never mind 'appropriate', to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits." While the economic effects of pollution can be debated all day long, the point is that the coal industry will undoubtedly benefit from this ruling. While the coal industry will surely gain from this ruling, evident in the coal industry's recent stock market gains, these benefits will be short-lived. The Supreme Court ruling will merely be a momentary reprieve for coal companies, as the coal industry is facing an irreversible decline.

Natural Gas Takeover Is Inevitable

The energy landscape has changed dramatically over the past decade, with shale gas making a huge entrance. While coal has traditionally been one of the cheapest forms of energy, natural gas is proving to be an extremely viable alternative. Even disregarding the pollution aspect of the coal and natural gas debate, constant advances in hydraulic fracturing technology is making natural gas the more cost-effective choice in a growing number of areas. The momentum of natural gas technologies is already too large for the coal industry to effectively respond to.

The continual governmental pressures being applied to the coal industry only further compound its descent. The current Supreme Court ruling on the EPA is the exception rather than the rule, as governments (e.g. global, federal, statewide, and global) are increasingly putting a heavier penalty on greenhouse gas emissions (GHG). Even notorious polluters like China are dramatically ramping pollution curbing efforts, and are shutting down an unprecedented amount of coal plants as a result. Emerging economies like India are also starting to focus a disproportionate attention on pollution given its very real negative consequences.

With such massive global pressures against pollution, individual countries will be even more pressured to act against pollution, all of which disproportionately harms the coal industry as coal is one of the dirtiest forms of fossil fuels. While natural gas also emits a fair amount of pollutants, it produces approximately half as much carbon dioxide as coal. This alone puts natural gas at an extreme advantage against coal as GHG penalties will inevitably increase moving forward. While the long-term case of natural gas is also debatable in light of solar PV's prospects, natural gas undoubtedly represents one of the largest immediate threats to the coal industry.

The Supreme Court Ruling against Obama's ambitious EPA regulation will have little to no impact on the coal industry in the long-run, and may postpone the industry's complete collapse by a few years at most. With hydraulic fracturing technology making natural gas increasingly more cost-effective versus coal and with the rising penalties for GHG emitters, the coal industry has no real way of recovering. Market forces are clearly starting to act against the coal industry, and the replacement of coal by other energy sources should only accelerate moving forward.

Coal plants such as this Beijing plant will increasingly be shuttered by all indications. There has been a marked acceleration of coal plants being phased out in recent years, with no signs of this trend relenting.

Source: Reuters/David Gray

Unprecedented Societal Pushback

Society has traditionally been disproportionately reliant upon coal, and rightfully so given how economically superior this fossil fuel has been in the past. With the rise and technological progression of cleaner alternatives, an increasing number of individuals are starting to believe that society's heavy dependence upon coal can no longer be justified. There have been many recent events that have only further catalyzed this societal pushback against coal, with the most notable being Pope Francis's encyclical condemning the use of fossil fuels.

The involvement of such a widely respected/followed religious figure in the discussion about pollution is unprecedented, and epitomizes society's increasingly negative attitude on this topic. Such a pushback will be extremely detrimental for the coal industry, as the politicians backing coal companies such as Alliance Holdings will feel increasing pressures to cut such ties. With public support and technological progression acting against the coal industry, it is only a matter of time before the coal industry faces complete collapse. The recent Supreme Court ruling against the EPA should not be able to reverse these negative industry trends in any meaningful way, as the coal industry has already passed its tipping point.

Global Coal Divestment

With major industrialized nations such as China and the U.S. starting to drastically cut their dependence on coal, other industrialized nations are starting to follow suit. Just recently, for instance, Germany decided to cut about 2.7 GW of coal power in order to meet its 2020 GHG emissions target. This cut accounts for approximately 13% of the country's entire brown coal power plant capacity, which shows just how serious countries are starting to become on the subject of coal cuts. As major industrialized nations start to phase out the usage of coal, other countries will likely be pressured to do the same.

Conclusion

While the Supreme Court's ruling against the EPA's emissions regulation may seem to be incredibly favorable for the coal industry, it will likely do very little to stop the industry's long-term decline. Many utilities and power companies heavily reliant upon coal in the past have already started restructuring their infrastructures to be less coal-based. In this sense, the damage had already been done to the coal industry by the EPA. Coal customers have largely started transitioning away from coal infrastructures in anticipation for increasingly unfavorable EPA rulings.

The future likely contains little to no good news for major coal companies such as Peabody Energy , Alliance Holdings , and so forth. While the stock markets briefly acknowledged the Supreme Court ruling with a sudden spike in coal company valuations, this upward reversal is already over. Investors involved in the energy industry would do much better looking to other energy arenas. The coal decline over the past decade has been much worse than anticipated, and will likely continue to underperform investor expectations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.