Why coal stocks may not benefit from the improving economy

Mayur Sontakke
July 25, 2014

Improving economy may not mean positive future for coal producers (Part 5 of 5)

(Continued from Part 4)

Coal stocks and the improving economy

As seen in the first section, the economy seems to be gaining traction. The stock market (SPY) is reaching new highs as investor confidence is coming back. The economic indicators are also increasing.

The environment seems to be perfect for new investments with consumer confidence rising and the interest rates still remaining unusually low. Even within the energy sector, ExxonMobil (XOM) has increased by 11.4% since February. Chevron (CVX) has done even better with 17% returns since February.

The unemployment rate has fallen to 6.1% in June—the closest it has been to the Fed’s target in the past five years. Coal producers (KOL) like Alpha Natural Resources (ANR) clearly seem to be missing benefits of the improving economy. In fact, the strengthening economy may turn against the whole industry.

Why the coal industry may miss the benefits of the improving economy

Coal industry is a labor intensive industry. According to the U.S. Energy Information Administration (or EIA), coal mines in the U.S. employed ~90,000 employees on an average in 2012. The number of employees has shown an uptrend since 2001 because producers require more labor to extract each ton of coal as productivity falls. With the productivity expected to continue to fall, the employment in the coal mines should continue to go up assuming the production levels are stable.

With the economy improving and the unemployment rate decreasing, the opportunities in other sectors, particularly in retail, should increase. The newer opportunities and diminishing pool of labor should increase the wages. Inflation is already trending upwards and the wages will follow the suit sooner or later. The assumption here is that the unskilled labor may be willing to switch from the coal sector to other sectors in the economy because they don’t have industry specific skills.

Higher wages would put pressure on coal producers’ cost structure, especially with productivity decreasing. Combined with the subdued outlook for coal demand and prices, the improvement in labor indicators could actually make the situation worse for coal miners in the short to medium term. As a result, we could see further closures of coal mines in the U.S. if the prices don’t pick up.

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