With the planned retirement of coal units, progress towards cleaner energy in full motion, and legislation aimed at reducing carbon emissions in place, the coal industry was expected to significantly underperform renewable energy indices and the broader market from 2021 onwards.

However, contrary to these expectations, the thermal and metallurgical coal industries have outperformed the market for the past three years, with a cumulative positive spread exceeding 200% over the period on an equal weight basis.

What market forces caused such a dramatic change in fortune?

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Over the past three years, the thermal and metallurgical coal industries benefitted from distinct drivers. The war in Ukraine boosted the thermal coal industry by driving prices for natural gas, rendering thermal coal-based electricity production more competitive.

The surge in metallurgical coal, heavily used for steel production, was led by solid demand from China (the primary steel consumer), the growing electric vehicle (EV) market, and limited production capacity.

In early 2021, the lag between supply and demand following complete or partial factory shutdowns due to COVID-19 restrictions was a common driver for both industries' strong performances.

With unexpected excess cash in hand, companies in the coal industry, particularly the metallurgical coal sector, reduced their debt burdens, lowering exposure to interest rates. Evidence of this is seen in the jump in net income in 2022 and improved free-cash-flow to EBITDA ratios.

The median debt-to-equity ratio, which was above 80% in 2021, currently stands at 9%, just one-fifth of the current median for the basic materials sector.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

As the exogenous forces driving the coal industry to recent highs dissipate, fundamentals are expected to deteriorate. For the quarter ending Q1 2024, the relative delta on median sales growth from a year prior for the coal industry is significantly worse than that for the basic materials sector.

Sales growth is falling much faster for the coal industry, with the thermal coal industry dropping from +65% to -8% and the metallurgical coal industry from 37% to -10%.

Although the recent energy crisis and rampant inflation have underscored the value of fossil fuels, the long-term headwinds favoring clean energy alternatives far exceed these short-term gains.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA