How the Election Just Killed Investing in Coal Stocks

In the days following the re-election of President Obama, one particular stock sector seemed to suffer more than most: coal stocks.

The Market Vectors Coal ETF (NYSEARCA: KOL) was down 5% the day after the election and individual coal company stocks were hammered even more. The largest U.S. coal producer, Peabody Energy (NYSE: BTU), dropped by 9% while the second biggest U.S. producer of coal, Alpha Natural Resources (NYSE: ANR) fell by 12%.

The reason behind the declines is the perception in the market that President Obama's re-election will mean further onerous regulation for the beleaguered U.S. coal industry.

Lucas Pipes, an analyst at Brean Capital Carret & Co., told Bloomberg News, "The coal industry has seen increased regulatory oversight from the EPA on a number of issues under Obama's first term, such as stricter permitting requirements in Appalachia and new regulations for emission reductions at utilities."

Earlier this year, for instance, the EPA issued its Mercury and Air Toxics Standards Rule, which is set to go into effect Jan. 1, 2015. It sets strict emissions requirements on utilities.

According to a study from the consultancy Brattle Group, compliance with the rule would cost between $126 billion and $144 billion to retro-fit older coal-fired power plants. Brattle estimates this will lead to a shutdown by utilities of between 59 and 77 gigawatts of coal-fired electricity over the next five years.

This means that between 18.6% and 24.3% of U.S. power will no longer be generated by coal.

Basically, EPA regulations have made coal more expensive to burn. This will reduce coal demand even further as utilities switch to cheaper, cleaner-burning natural gas. Already the share of U.S. electricity supply coming from coal plants has fallen to its lowest level in almost 40 years.

At times this year, coal has lost its position as the country's biggest source of power, falling behind natural gas. Not surprising then that production from the U.S. coal industry has fallen 8% from 2008 to only 266 million tons in the first quarter of 2012.

Politics Votes Against Investing in Coal

One of the few bright spots for the coal industry recently has been its ability to export thermal coal to energy-hungry Asia and Europe too. Last year, U.S. coal exports were at their highest level since 1981.

But that may change soon for companies that want to export coal to Asia.

Coal exporters have identified five ports in Oregon and Washington to use to export coal to Asia. But Sen. Ron Wyden, D-OR, may stand in the way. He is expected to become Chairman of the Senate Committee on Energy and Natural Resources, replacing retiring Sen. Jeff Bingaman, D-NM.

Sen. Wyden is highly skeptical of sending U.S. coal abroad. He has called for more rigorous environmental reviews of each coal export terminal proposal. Sen. Wyden is concerned about the impact of coal dust all along the transportation route from the Powder River Basin in Wyoming to the port facilities.

Needless to say, any environmental review could hold up coal exports from the Pacific Northwest for quite a long time.

Thanks to the political winds, some companies that planned to build some of the needed infrastructure are bowing out. In August, RailAmerica announced that it had abandoned a plan to build a coal export facility on the Washington coast.

Daniel Gabaldon, from Boston Consulting Group's Washington, D.C. Office, says that U.S. coal companies cannot rely on exports to save it.

He warned, "It's not clear that there will be a happy ending for coal mining."

That is the same assessment investors seem to be giving about investing in coal stocks in President Obama's second term.

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