Some bargain hunters may be looking at the downtrodden coal industry and related exchange traded funds as the market remains near historic lows. However, coal remains depressed for a reason.
Over the past three months, the Market Vectors-Coal ETF (NYSEArca: KOL), which tracks the coal industry, has declined 6.9%. Additionally, the recently launched GreenHaven Coal Fund (NYSEArca: TONS), which is designed to offer investors with exposure to daily changes in the price of coal futures contracts, has decreased 3.6%.
Some may be tempted to catch the falling knife as the economy still depends on coal to meet growing electricity needs. However, the other fundamental factors may weigh on the space.
“Although the US’ dependency on coal is reducing, there is no doubt that coal will remain a pillar of US electricity generation for a very long time,” Credit Suisse analysts headed by Nathan Littlewood said in a note, according to Benzinga. “The sector has a LTM ND/EBITDA of 15.5x however, and we need to see either large-scale supply discipline (unlikely but possible) or bankruptcies and restructurings (more likely) in order to emerge from the other end of the tunnel.”
Credit Suisse analysts analyzed Arch Coal (NYSE: ACI), Alpha Natural Resources (NYSE: ANR), Peabody Energy (NYSE: BTU) and Cloud Peak Energy (NYSE: CLD), but they did not find a “whole lot of love” for the space, reports Ben Levisohn for Barron’s.
“Deciding whether to own U.S. Coal Equities is about weighing up the relative appeal of the incredibly cheap commodity price options that these stocks represent, with the risks of a dire macro outlook that is leading to increasingly troublesome balance sheets and liquidity issues,” Credit Suisse analysts said.
Specifically, the analysts lowered their outlook on Arch Coal and Alpha Natural Resources due to high recapitalization risk and liquidity risks. The analysts argue that the companies are suffering from deteriorating balance sheets and high debt burdens. Additionally, the analysts had a neutral outlook on Peabody Energy.
KOL includes 0.5% ACI, 0.4% ANR, 2.3% BTU and 0.8% CLD. The ETF dipped 2.5% Tuesday.
Market Vectors-Coal ETF
For more information on the coal market, visit our coal category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.