Published November 07, 2012
Coal stocks are suffering savage losses a day after President Obama handily won a second term, easily defeating Republican rival Mitt Romney. Shares of Peabody Energy (BTU), the largest U.S. coal producer, are down 8.5 percent on volume that is nearly 50 percent above the daily average in midday trading.
Coal equities had been dealing with a tough 2012 due to slumping natural gas prices and slowing emerging markets demand. Low natural gas prices and record production in the U.S. prompted many electric utilities to move away from coal to cheaper, cleaner gas with some analysts speculating some of those power producers may never return to coal.
With the economies slowing in major emerging markets such as China and India, U.S. coal producers with exposure to metallurgical coal, such as Alpha Natural Resources (ANR) and Peabody, were hammered. Metallurgical is the grade of coal that is essential in steel production.
Even with those headwinds, the coal sector found a bottom in September and started to climb higher as the race for the White House tightened. Coal equities were seen as prime near-term beneficiary of a Romney win because the Republican championed domestic energy production during his campaign. Conversely, some traders viewed the President as a coal adversary because alternative energy, such as solar and wind, have been cornerstones of his energy agenda since he took office in 2009.
In the month leading up to the election, the Market Vectors Coal ETF (KOL) gained almost nine percent, but that ETF is off more than five percent today on volume that is nearly quadruple the daily average.
Swing States Romney carried four of the top five coal-producing states, but lost Pennsylvania and its 20 electoral votes. That was not a surprise given that Pennsylvania has not been carried by a Republican presidential candidate since 1988. However, the loss of Ohio and its 18 electoral votes doomed Romney and coal stocks.
Ohio does have some coal exposure and the state was viewed as essential to Romney's hopes of winning. Traders apparently thought the former Massachusetts governor would carry the Buckeye State as they bid up coal equities in the month leading up to the election.
Even when accounting for today's 10.3 percent slide, Alpha Natural is up almost 31 percent in the past month. Peabody is up 19.2 percent over the same time and that includes today's 8.4 percent tumble. Arch Coal (ACI), Joy Global (JOY) and Walter Energy (WLT), all of which are deep in the red today, are still sitting on one-month gains.
More Downside Significant risks to coal equities remain. Natural gas is still abundant, clean and cheap. The market now knows it must contend with a second term of a president that is not a major coal fan. Combine those factors and it is easy to see coal's fundamental thesis is severely damaged.
Looking at the charts, Peabody's slide today has taken it below its 200-day moving average, a bearish sign. Alpha Natural, Arch and Walter have not been above their 200-day lines for multiple months, implying those names have shaken out of their bear markets. That could make that trio vulnerable to further selling pressure as traders adjust to the reality of another four years of President Obama.
Consol Energy (CNX), the coal stock that looks good by comparison against the rest of the group today, could prove the name that is the sturdiest going forward. Despite its coal exposure, Consol also has proved natural gas reserves of 3.5 trillion cubic feet, giving the company some leverage to the ditch-coal-embrace-gas trade so many electric utilities have committed to.
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