After nearly doubling to rank as one of 2016’s best-performing non-leveraged exchange traded funds, the VanEck Vectors Coal ETF (NYSEArca: KOL) is up more than 14% this year. The other side of that equation is that coal investments remain politically charged and it is becoming apparent to some investors that President Donald Trump will face challenges when it comes to rejuvenating the U.S. coal industry.
Cheap natural gas has previously weighed on coal demand as electric utilities have switched to that cleaner-burning fuel over coal. The ongoing shale oil boom has pressured natural gas prices and made natgas a cheap alternative to coal. Additionally, new environmental regulations have forced coal-fired power plants to close, and many are being replaced with natural gas.
KOL was boosted in significant fashion last year on expectations that President Donald Trump would create more coal-related jobs, but investors should approach that thesis with caution.
“President Donald Trump signed an executive order on Tuesday that will begin a lengthy process of dismantling former President Obama’s signature achievement on climate change – regulations that put limits on greenhouse gas emissions from power plants. Trump boasted about a new era of American energy,” reports OilPrice.com.
A centerpiece of Trump’s campaign was reaching out to coal miners, a strategy that helped Trump win nearly all the major coal-producing states with the exception of Illinois. Of course, any politician must make good on promises made to voters or risk being defeated in the next election. The 2020 presidential election is a long way off, but Trump needs to get coal miners back to work. Whether he can is another story.
“But coal lost that war years ago. Cheap natural gas has been undermining the business case for coal for nearly a decade now, well before former President Obama took aim at power plant emissions. Coal’s real enemy has long been the “shale gas revolution.” More recently, renewable energy has piled on the pain. Rapidly expanding installations of solar and wind power are grabbing more market share, putting deeper pressure on coal,” notes OilPrice.com.
With U.S. demand for coal in question, producers may be forced to international markets, mainly emerging economies, such as China. Increased steel production could also help U.S. producers of metallurgical coal.