The Coal Industry Is In The Discouragement Phase For Now

Bloomberg Businessweek published a bearish view on the coal industry recently. The article has the feel of they ‘threw in the towel’ for coal.

Coal’s Future Is Rocky at Best

Is coal doomed? The dirty yet abundant energy source has had some rough patches before, but nothing like this. In 1985 coal accounted for 57 percent of all power generated in the U.S. Last year it was 42 percent. The U.S. Energy Information Administration estimates it will fall to 40 percent this year. Prices for Appalachian coal are down 24 percent over the past 12 months; for coal from the Powder River Basin in Montana and Wyoming, they’re down 45 percent. “With the prices you’re looking at now, no one can make money,” says Lucas Pipes, an analyst at Brean Murray, Carret.

Coal is in a struggle with a perfect adversary: ultracheap natural gas. With all the shale reserves unlocked by fracking, gas prices have steadily declined since mid-2008, to the point where they’re hovering around $2 per million British thermal units for the first time in a decade. That’s lower than coal prices. The natural gas is all domestically derived energy, so the country’s fuel import bill doesn’t go up. It’s clean. And it’s so abundant that the industry may run out of places to store it. Utilities that switch to natural gas are already passing savings on to customers. In 2013 residential U.S. utility bills should fall 1 percent.

via The Atlantic: Is Coal Doomed?

Slowly but surely, America is winding down its centuries-old love affair with coal. It’s been a fine long-term relationship. But thanks to the deluge of cheap natural gas pouring from domestic shale deposits, the United States is burning less and less of the dirty black stuff to generate power.

The trend has become so dramatic that Bloomberg Businessweek is now asking a question that would have been unthinkable just a few years ago: “Is coal doomed?”

When one sees articles like this you have to go back to the Justin Mamis Investor Sentiment Cycle research for possible opportunities.

DISCOURAGEMENT
After a long price slide, the area where churning takes place is between the Discouragement and the Aversion phase, after a significant decline has already taken place. Often, this appears as a head and shoulders bottom, a cup and handle or a saucer dish pattern. As the public continues to dump stocks, short sellers become bold and bearish. Their views are supported by bad news and poor economic data. Prognostication of lower prices to come is undoubted. This is when everyone knows that the market cannot ever go up again, and that anything, even cash, is preferable to owning ‘coal’ stocks.

A one year chart of KOL, BTU, ACI, PCX and ANR.

Contrarian investors would be watching the coal industry with all this negative investor sentiment.

[H/T Abnormal Returns]