The coal industry powers the world. But there are some risks when investing in this plentiful fossil fuel — including the rise of natural gas, government policies and fluctuating demand.
What is coal?
Coal is a rock that’s predominantly made of carbon. Its combustible properties make it useful to burn for fuel and accounts for almost 40% of the world’s electricity generation.
Despite a growing climate change movement and calls for green energy, the coal demand is forecasted to remain stable into 2024. That being said, in 2018 the Government of Canada announced regulations that are intended to phase out traditional coal-fired electricity by 2030.
90% of of the world’s coal supply is produced by 10 countries with China, India and the United States leading the pack. Canada is in 13th place, producing 1% of the world’s coal supply. Canada is the 4th largest coal exporter in the world behind Australia, the US and Russia. Most of the coal produced in Canada comes from Alberta and British Columbia.
Coal stocks are stocks in any companies that mine and process coal for electricity plants and steel production.
Why invest in coal stocks?
China consumed over 50% of the world’s coal production in 2018, according to the BP Statistical Review of World Energy. While the global coal demand should remain stable through 2024, China’s coal demand is predicted to peak in 2025.
High demand for this fossil fuel is likely to bump coal stock prices in the foreseeable future. So although coal won’t be the dominant energy source that it once was during the Industrial Revolution, the industry is hardly disappearing.
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Risks of investing in coal
Coal stocks face 3 primary obstacles:
Government policies. When coal is burned for energy, it produces greenhouse gas emissions. Governments are adopting stronger climate policies to reduce air pollution by slowly phasing out coal power generation. For example, the Canadian government is implementing regulations to phase out coal-fired electricity by 2030.
Competition. Renewable energy, including wind, solar power and natural gas, are slowly edging coal out of the market. For example, coal generation is forecasted to drop by more than 5% every year through 2024 in Europe and the United States.
Developments in China. Being a coal consumer giant, China strongly influences coal demand. China anticipates consumption to peak in 2025, while the International Energy Agency thinks demand could plateau as soon as 2022. Either way, coal demand will steadily fall as China weans off of coal and implements its cleaner energy strategy.
Coal stocks
Many coal stocks trade on the New York Stock Exchange, and some trade on the TSX. But certain stocks, including China Shenhua Energy Co. Ltd., are only available over-the-counter (OTC Markets, Pink Sheets) or from an international exchange.
China Shenhua Energy Company Limited (OTC Markets, Pink Sheets: CSUAY)
Yanzhou Coal Mining Company Limited (OTC Markets, Pink Sheets: YZCAY)
China Coal Energy Company Limited (OTC Markets, Pink Sheets: CCOZF)
What ETFs track the coal category?
One exchange-traded fund in the coal industry is the VanEck Vectors Coal ETF (NYSEARCA: KOL). This ETF tracks the overall performance of companies involved in coal operations.
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Bottom line
Coal stocks could be a solid short-term investing opportunity. Demand should steadily increase in the upcoming years, but keep your eye on renewable energy and natural gas that’s slowly inching toward a bigger piece of the energy pie.
When the international climate change treaty known as the Paris Agreement was signed in 2015, coal demand was in the middle of a 3-year decline. The agreement pushed to phase out coal and caused some investors to pull out of the coal power sector. But in 2017, the global demand for coal rebounded. And the demand expects to remain steady through 2024, according to the International Energy Agency.
TransAlta Corp. (TSX: TA) owns the largest coal mine in Canada by surface area, Highvale Mine in Alberta, as well as the largest coal-fired power plant in Western Canada, Sundance (Alberta). Along with Fording Canadian Coal Trust, it jointly owns the largest coal mine in British Columbia, Elk Valley. TransAlta’s revenue was $2.1 billion in 2020 down from $2.3 billion in 2019.
Canada generated 57 million tonnes of coal in 2019 and is the 13th largest coal producer worldwide.
Peabody Energy Corp. (NYSE: BTU) is the largest producer in the US.
The US generated 702 million tonnes of coal in 2018 and is the 3rd largest coal producer worldwide.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
Kimberly Ellis is a personal finance writer at Finder, specializing in banking and financial literacy. After teaching in public and private schools, Kimberly zeroed in on personal financial education to help families and kids develop lifelong money skills. She hails from New York City, graduating summa cum laude from Queens College with a BA in elementary education and mathematics, as well as a New York State teaching certificate. She’s also an aspiring polyglot, always in a book and forever on the hunt for the perfect classic red lipstick.
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