Still Some Lumps With The Coal ETF

Declining costs for alternative energy coupled with countries and states pushing for increased use of clean energy sources are among the factors weighing on the global coal industry.

The VanEck Vectors Coal ETF KOL is up nearly 9 percent year-to-date, indicating some investors still have appetites for coal, but that performance sharply lags that of the broader market.

What Happened

Over the past three years, KOL is up 78 percent, easily outpacing the S&P 500 and more than doubling the performance of the S&P 500 Materials Index over that time. Much of that jump was accumulated from mid-2016 through 2017, indicating KOL responded positively to Donald Trump taking the White House in November 2016.

On the 2016 campaign trail, Trump promised to rejuvenate the U.S. coal industry. For a while, investors were enthusiastic about those prospects, but KOL tumbled 16.5 percent last year.

“Between 1979, when employment in coal mining peaked, and 2000, the industry lost nearly 75% of its jobs,” said FactSet. “As output stabilized after 2000, so did employment.”

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Why It's Important

In 2018, coal accounted for 27.4 percent of U.S. electricity generation, down from 48 percent a decade earlier, according to FactSet data. The abundance of cheap, cleaner-burning natural gas coupled with the declining costs for alternatives, such as solar and wind, have stymied domestic coal consumption.

From a political standpoint, it would be easy to say the Trump Administration hasn't made good on its promises to stem the domestic coal industry's slide. In the eyes of some observers, KOL's laggard status in 2019 could confirm as much, but there is more to the story and that story includes robust global appetite for U.S. coal.

“While coal’s dominance for domestic electricity production is waning, global demand for U.S. coal is increasing; in fact, the U.S. is a net exporter of coal,” said FactSet. “According to the EIA, in 2018 15% of U.S. coal production was exported to other countries, with exports reaching their highest level in five years. The U.S. exports both steam or thermal coal, used to generate electricity, and metallurgical (met) coal, which is used in the steel-making process.”

What's Next

Metallurgical coal, the coal used to produce steel, is something some of the U.S.-based companies residing in KOL can potentially hang their hard hats on going forward.

“Strong demand from Asian countries for met coal has helped to support higher global prices, encouraging U.S. producers to increase their investments in met coal mining,” said FactSet. “Coal mined in the Appalachia region is particularly suited for steel production, and with the region’s proximity to coastal export facilities, the producers in this region are well-positioned to boost their export production.”

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