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Should you buy coal stocks?

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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.

coal

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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Comments
Matthew Ridgway
December 16, 2015 11.53am

If your recommendation is to NOT buy/hold coal stocks, can you explain why George Soros recently purchased millions of dollars worth of coal assets from Peabody? He is one of the largest private investors in the US and a vocal champion of the renewables industry who has supposedly spent over a billion dollars funding divestment groups and left-wing activists. It is interesting what game he is playing when he uses his wealth to talk down the coal industry and fund divestment campaigns, but ends up buying those same assets he exhorts others to divest. Is it just market manipulation on a grand scale?
At the end of the day and regardless of the politics or real environmental concerns, it certainly looks like those that CAN shape the market are doing it. Money talks and several other investors like him seem to BUYING coal for it's outlook and not divesting. Please discuss.

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