Should you buy coal stocks?

Many investors are worried about the troubles of the fossil fuel industry and we believe coal stocks should be firmly in the do-not-buy category. Since peaking in July 2008, the price of thermal coal has fallen 70% and supply still outpaces demand.

We believe there are four structural factors causing this downturn:

1. Coal use in China fell last year for the first time since economic reforms began in 1978 and signs are that the trend will continue. This is largely due to a weaker economy but China is also the major investor in renewable energy globally. Alleviating pollution is another push factor and the Chinese government has said Beijing's coal-fired power stations will close by 2020.

2. Japan has ramped up coal consumption but this is only transitional and will fall when it restarts more nuclear power plants and builds the large amount of solar capacity it has approved.

3. The developed world's use of "poles and wires" electricity has either stagnated or declined. Economic weakness has undoubtedly contributed but increased energy efficiency, distributed generation and behavioural changes are also factors.

4. The US Environmental Protection Agency (EPA) is targeting reduced carbon emissions from existing power stations and setting a standard for new plants. Expect more closures of non-compliant coal-fired power plants and little construction of new ones. And the European Union has targeted a 40% reduction in greenhouse gas emissions from 1990 levels by 2030.

So markets are fundamentally changing the way they regulate and consume coal. It is the cheapest form of power generation but that is insufficient to offset other concerns.

David Macri, Australian Ethical Investments

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