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Daily Intelligence Briefing

Thursday, April 28, 2022

Identifying Change-Driven Investment Themes

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

Coal Stocks Soar on Russian Invasion, Europe and China Boosting Production Amid Energy Insecurity

Summary: A coal industry revival has been accelerated in recent months, boosted by the Russian invasion of Ukraine that has upended energy markets and left many countries scrambling to meet power demand. The fossil fuel that many climate experts believed was finally on the way out is now experiencing its strongest demand in years, exacerbated by a natural gas crunch that has worsened since last year.

After generating the most electricity ever from coal in 2021, global coal consumption is expected to set another record this year and remain at those levels through at least 2024. Coal-fired power plants that were once decommissioned are now being brought back online as the European Union focuses on trying to keep the lights on. Despite renewable energy initiatives spreading across the globe, coal has re-asserted its critical role in the global energy portfolio as countries prepare to boost production.

Related Stocks: NACCO Industries, Inc. (NC), Peabody Energy Corporation (BTU), CONSOL Energy Inc. (CEIX)

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Coal Revival Boosted by Ongoing European Energy Crunch

Despite greater renewable energy development and climate friendly initiatives spreading across the globe, the world’s reliance on coal continues to play a significant role in the global energy portfolio.

The coal industry comeback was first sparked by a natural gas crunch facing the European Union for much of the last year. While tight natural gas supplies first began in the fall of 2021, markets have yet to find balance with prices remaining historically elevated, hitting a 13-year high recently in the United States. In Europe, prices continue fluctuate in line with the news coming out of Russia, with the most recent update being that Russia has halted gas deliveries to Poland, per Bloomberg.

MRP highlighted the European energy crunch back in December, noting that countries across the region were increasingly reliant on coal-fired power plants to keep the lights on. That trend looks to continue as the Russian invasion of Ukraine has upended energy markets once again.

In 2021, the world generated more electricity from coal than ever before, up 9% compared to the previous year according to the International Energy Agency (IEA). Now, much of the world is shunning Russian energy supplies, including coal, and demand is higher than it has ever been before.

Bloomberg believes the Russian war has turbocharged the coal market, causing power producers to scramble for supplies while prices climb near record levels.

According to Reuters, European countries imported a total of 7.1 million tons of thermal coal in March, a 40.5% increase year-over-year and the highest level since 2019. However, that those shipments included imports from Russia, which the EU is looking to ween of off now. Alternatives to Russian coal do exist, yet they will be costly as the EU depends on Russia for 45% of its coal imports.

Europe has looked to the United States to fill their coal supplies as they continue to struggle with the significant supply and demand imbalance. Bloomberg reports that US coal prices recently topped $100 per ton for the first time in 13 years, in part due to an economic rebound from the pandemic that has driven up demand for fossil fuels.

Coal future prices for the Australian benchmark, which typically do not surpass $100 a metric ton, surged to $280 in October amid the beginning of a natural gas shortage, but then jumped over $440 a ton once Russia invaded Ukraine, an all-time high.

Currently, coal is expected to grow in importance in the short term, yet there are significant supply deficits to overcome with Russian coal imports banned. That is likely to keep prices elevated through the year and cause global coal producers to try and ramp up operations, reversing course on renewable energy trends to avoid a worsening global energy crisis.

Europe Ready to Bring Decommissioned Coal-Fired Plants Back Online, China Increases Production

Once decommissioned coal-fired power plants have begun to restart operations, highlighting a sustained reliance on fossil fuels to meet global energy needs even as climate friendly initiatives gain steam.

In 2022, total coal consumption is expected to climb by 2% to a record of just over 8 billion metric tons and remain at that level until 2024, per BloombergThe IEA report stated that there is growing evidence that there is a widening gap between political ambitions and the realities of the current energy system needs, which is likely to affect net-zero goals.

Greece has announced it will be ramping up coal mining over the next two years as a temporary measure to help reduce their dependence on gas from Russia. Prime Minister Kyriakos Mitsotakis said earlier this month that the country will be increasing its coal-fired energy generation by ramping up mining 50%, Reuters repoted.

The United Kingdom is reportedly mulling over a decision to launch the country’s first deep coal mine in nearly three decades for greater energy security. Both Germany and Italy are also considering restarting coal-fired power plants while the US is in the midst of its biggest coal revival in a decade.

Alex Stuart-Grumbar, dry bulk analyst with shipping consultancy MSI, said “The initial disruption to trade patterns push global coal prices higher, incentivising China and India to produce more coal domestically.”

China has already been boosting their coal production. reports that China’s coal production rose 15% in March from the same month a year prior, and that rise is likely to be sustained as China looks to capitalize on global energy needs and uncertainties in Russia. In 2022, China will boost coal capacity by 300 million tons this year, equivalent to a 7% rise from last year, NPR notes.

Li Shuo, senior global policy adviser for Greenspace, believes that China’s mentality of ensuring energy security has become dominant, trumping their carbon neutrality goals.

After a record year in 2021, global coal production is set to rise further as the European Union struggles to meet its energy needs after announcing sanctions on Russian exports. Coal’s revival has been turbocharged following the Russian invasion of Ukraine, boosting global dependence on the fossil fuel despite pledges to switch to renewable energy sources.


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