An Industry in Severe Trouble

We always keep a close eye on industries that are in trouble (as our countless articles on the gold industry probably demonstrate), because this is where bargains usually emerge. We have a simple rule of thumb: Investment success depends primarily on one thing, namely how cheaply one buys.

Show us a stock market with a single digit P/E ratio (like the Russian or Greek markets these days) and we will begin to look at it as a potential opportunity. We don’t care much for tech stocks with triple digit P/Es, even though we may acknowledge their worth as successful companies and even use their products.

Photo via telegraph.co.uk

One market sector that has suffered a bout of destruction like few others is the coal industry. This chart of the coal miners ETF KOL should convey a rough idea of just how bad things have become:

Click on picture to enlarge

The coal miners ETF KOL has collapsed in recent years

 Many well-known coal companies (e.g. Patriot Coal and Alpha Natural Resources) have gone bankrupt. There are several reasons for this. For one thing, there has been huge malinvestment in all sorts of commodity-related industries, as monetary pumping by the Fed and the PBoC has artificially inflated demand for commodities and driven their prices to unsustainable levels.

In the course of this, many coal companies have taken on more debt than they were able to support in the event of a sharp decline in coal prices. Given that at its peak, the “China story” about unceasing demand for commodities apparently sounded very convincing to many people, they probably didn’t expect that a huge slump in coal prices was imminent. And yet, this is precisely what happened.

However, there are also other reasons for the woes of coal producers. A major one is the sharp deterioration in the regulatory environment, which is largely the result of a topic beloved by the political left, namely climate alarmism. Power generation with coal is considered “dirty” and coal plants have been subject to stiff regulatory restrictions for quite some time.

Things got worse for the coal industry after environmental bureaucracies declared CO2 a “pollutant” (keep in mind here that plants need CO2 to survive). This view of CO2 is based on climate alarmism and the hypothesis that CO2 production by industrial civilization is causing “catastrophic global warming”. Of course, not even the most basic predictions of the alarmists have come true so far (e.g. over the past approx. 19 years, there has been precisely zero warming while CO2 in the atmosphere has increased by one third). It looks more and more like a total scam designed to extort tax payer funds and expand government control over the economy even further.

The RSS satellite monthly global mean surface temperature anomaly dataset shows no global warming for 18 years 7 months – i.e., since January 1997. Needless to say, reality is diverging rather dramatically from the “model predictions” of the alarmists.