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Paris Climate Agreement an Air Horn in the Coal Mine

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If pure play coal companies weren’t getting pummelled enough by the global drop in demand for their product, an agreement to reduce global greenhouse emissions signed here in Paris over the weekend will likely be the straw that breaks the camel’s back.

 
 

It’s only been a couple days since the Paris Agreement was signed and by the looks of some of the early analysis by major financial players, I am betting there is more than a few coal executives sweating this morning.

 
 

In its analysis of the Paris agreement the free-market agency of record, The Economist, proclaimed that, “the age of fossil fuels has started drawing to a close” and that “the idea of investing in a coal mine will seem more risky.”

 
 

In a note to clients and investors today, Barclays, the seventh large bank in the world, warned that:

 
 

“… the Paris Agreement represents a strong outcome and will therefore help boost the long-term fundamentals of the capital-goods and low-carbon power-generation sectors while weakening the long-term fundamentals of fossil-fuel industries.”

 
 

With uncanny timing there was bold statements issued about coal in the weeks running up to and during the Paris climate summit by some of the biggest players on Wall Street.

 
 

The normally pro-coal financial research firm Wood Mackenzie, issued a report just prior to the Paris Agreement finding that, “more than 65 per cent of world coal production operates at a loss.”

 
 

The Wall Street giant Merrill Lynch said two weeks ago that “coal has become a stranded asset.”

 
 

And Goldman Sachs sent out an investors note on November 30th saying that 90% is:

 
 

“the amount of market capitalization the four biggest US coal companies lost in 2015. These companies struggled as coal prices fell and clean energy options became more competitive.”

 
 

These are not market signals. These are loud ear-piercing air horns and they are coming at a time when coal is already in a very weakened position.

 
 

US coal companies like Peabody Energy (NYSE:BTU) and Arch Coal (NYSE: ACI) have been absolutely pummelled over the last year.

 
 

Peabody’s stock has dropped from a a high of over USD$1,000 per share mid-2011 and is now trading at less $9 per share. Arch Coal shares are trading so low that they will likely be removed from the New York Stock Exchange all together.

 
 

World coal demand has been in a slump for some time now. Earlier in the year, China’s largest coal company Shenhua warned that demand for coal in that country would be down significantly in 2015 and that prediction has proven to be true.

 
 

I have heard from more than one person that the impact of a deal in Paris on climate change was baked into coal shares in the weeks and months running up to the global summit, with savvy investors calling the drop well ahead of the agreement.

 
 

So we likely won’t see any huge drops this week in coal shares.

 
 

But with the ink now dry on a new global climate treaty I think it is going to get even worse for coal in 2016, and by the looks of what the big financial players are saying, I am in good company.

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