The Zacks Coal industry stocks are suffering due to a decline in the use of coal in thermal power plants in the United States. In 2024, the demand for coal will be adversely impacted by the planned retirement of coal units and the utilization of more renewable sources for electricity generation. The ongoing energy transition, with utility operators steadily phasing out coal units, may hit the coal industry. Then again, the continuing conflict between Russia and Ukraine is creating fresh demand from European coal-importing countries. Despite a drop in coal production, export volumes are likely to boost the prospects of coal stocks like Arch Resources ARCH. Other coal stocks like Alliance Resource Partners L.P. ARLP and SunCoke Energy Inc. SXC, with high-quality met production volumes, are expected to gain during this difficult phase.
About the Industry
The Zacks Coal industry comprises companies involved in the discovery and mining of coal. Coal is mined through the opencast or the underground method. The commodity is valued for its energy content and used worldwide to generate electricity and manufacture steel and cement. Per the U.S. Energy Information Administration (“EIA”) report, the current U.S. estimated recoverable coal reserves are about 252 billion short tons, of which about 58% is underground mineable coal. Given the current production rates, coal resources are likely to last many years. Five states in the United States contribute 70% of the yearly production of coal and 60% of the coal production from surface mining. Per EIA, the demand for coal will decline due to the usage of more renewable assets and a gradual shutdown of coal-powered generation units, hurting the prospects of the coal industry.
3 Trends Likely to Impact the Coal Industry
U.S. Coal Production and Price Drops: Per EIA’s projection, coal production in the United States is expected to drop in 2024 and 2025. EIA projects U.S. coal production to decline 14.3% from 2023 levels to about 499 million short tons (MMst) in 2024 and register a decline of nearly 1% to 494 MMst in 2025 due to the expected reduction in coal usage in electricity production. Coal prices are expected to drop further from last year’s levels. EIA projects coal price to be $2.47 per million British thermal unit (Btu), a drop of nearly 2% from the 2023 level, and the price is expected to drop further to $2.41 per million Btu in 2025. This would hurt coal operators as they fight a tough battle against other cleaner sources of energy.
Despite Reliability, Emission Policy to Hurt Coal Industry: Coal is still a reliable source of energy and ensures 24×7 electricity production from the generation units. However, increasing emission concerns are resulting in reduced usage of coal in electricity generation. The United States’ Sustainability Plan includes an aim toward transitioning to 100% carbon pollution-free electricity by 2030 and achieving net-zero emissions by 2050. Utility operators are now focused on generating more electricity from clean energy sources, lowering coal usage and gradually shutting down the existing coal-based electricity generation units. Per EIA, coal’s share in U.S. electricity generation would drop from 17% in 2023 to 16% in 2024 and further to 14% in 2025. Unless utility operators invest heavily in pollution-control measures to reduce emissions from power plants, domestic coal usage will continue to drop. Coal industry operators should brace themselves for challenges as several electric utilities have decided to become carbon neutral and are aggressively cutting down on coal usage. Coal-fired units are gradually becoming a backup unit for utility operators in case of emergency power requirements.
Coal Industry’s Silver Lining is Rising Exports: Despite an expected drop in coal production volumes, coal operators in the United States can benefit from the expected rise in coal export volumes. Coal demand is expected to improve due to its economical pricing compared with other energy sources. Coal is still a viable energy option for many crucial industries across the globe. Per EIA, coal export volume in 2024 will be unchanged from the 2023 level due to higher export of metallurgical coal from the Appalachia region in the first quarter. Export volumes in 2025 are expected to improve 7.1% from the 2024 levels. The World Steel Association forecasts a rebound in global steel demand, rising 1.7% in 2024 to touch 1,793 metric ton (Mt) and further increasing by 1.2% in 2025 to reach 1,815 Mt. Steel production requires ample high-quality coal, and nearly 70% of global steel production depends on it. With the continued recovery in steel demand, coal exports are expected to pick up and improve in the long run.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Coal industry is a nine-stock group within the broader Zacks Oil and Energy sector. The industry currently carries a Zacks Industry Rank #247, which places it in the bottom 1% out of 249 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster performance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since May 2023, the coal industry’s earnings estimates for 2024 have decreased 35.2% to $3.61 per share.
Before we present a few coal stocks that you may want to keep track of, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Coal industry has outperformed the Zacks S&P 500 composite and the Zacks Oil and Gas sector over the past year.
The stocks in the coal industry have gained 32.5% compared with the Zacks Oil-Energy sector’s rally of 2.4%. The Zacks S&P 500 composite has gained 28.2% in the same time frame.
One Year Price Performance
Coal Industry’s Current Valuation
Since coal companies have a lot of debt on their balance sheet, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
The industry is currently trading at a trailing 12-month EV/EBITDA of 4.4X compared with the Zacks S&P 500 composite’s 14.7X and the sector’s 15.5X.
In the past five years, the industry has traded as high as 7.6X, as low as 2.01X and at the median of 4.33X.
Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs S&P 500
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Enterprise Value-to EBITDA (EV/EBITDA) Ratio vs Sector
3 Coal Industry Stocks to Keep a Close Watch On
Arch Resources Inc.: St. Louis, MO-based Arch Resources produces and sells metallurgical and thermal coal. The company commenced longwall production at the Leer South mine, which will add high-quality 3 million tons of metallurgical coal annually to its total production. The ongoing rebound in production in the steel industry will create fresh demand for met coal supplied by the company.
The current dividend yield is 0.58% compared with industry yield of 0.28%. The stock has gained 5.7% in the past six months, outperforming its industry’s rally of 1%. The Zacks Consensus Estimate for its 2024 earnings per share indicates a decline of 47% from the 2023 reported figure, while the same for 2025 earnings indicates a decline of 62% year over year. Arch Resources carries a Zacks Rank #3 (Hold) currently.
Price and Consensus: ARCH
Alliance Resource Partners L.P.: Tulsa, OK- based Alliance Resource Partners produces and sells coal to utilities and industrial users in the United States. The firm produces coal from several mining complexes operated by its subsidiaries. ARLP earns royalty income from coal produced by its mining complexes and royalty income from mineral interests it owns in different basins.
The Zacks Consensus Estimate for its 2024 earnings per unit indicates a 14.2% year-over-year decline, while the same for 2025 earnings implies an increase of nearly 1% year over year. The stock has gained 6% over the past six months. The firm currently has a Zacks Rank #3.
Price and Consensus: ARLP
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SunCoke Energy: Lisle, IL-based SunCoke Energy is a raw material processing and handling company serving steel and power customers, with principal businesses in coke making and logistics. With an annual 5.9 million tons of coke-making capacity, it is poised to benefit from rising met coal exports and increasing demand for met coal from the steel industry. The company plans to invest in the range of $75 million to $80 million in 2024 to expand its operations.
The current dividend yield is 0.58% compared with the industry yield of 0.28%. The stock has gained 5.7% in the past six months, outperforming its industry’s rally of 1%. The Zacks Consensus Estimate for 2024 earnings per share indicates an increase of 32.4% year over year. The current dividend yield of the company is 3.75%. The stock has gained 15.8% in the past six months. SunCoke Energy carries a Zacks Rank #3 at present.
Price and Consensus: SXC
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Alliance Resource Partners, L.P. (ARLP) : Free Stock Analysis Report
SunCoke Energy, Inc. (SXC) : Free Stock Analysis Report
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