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Are Coal Companies in a Death Spiral?
By JJ Jahania

The First Industrial Revolution in the United States, between about 1820 and 1870, was a period of extraordinary growth. Our nation's entire economy transformed dramatically as technological developments allowed businesses to expand their production systems in a big way.

Traditional hand tools and other manual processes were replaced with powerful machinery. Of course, a reliable energy source was essential to power this transition, which came primarily in the form of fossil fuels, especially coal. In 1830, large scale coal mining was still an infant industry, with our entire nation producing a mere 450,000 tons of coal per year.

However, by 1890, the U.S. became the world's leading producer of coal, mining a total of over 140 million tons annually. This is equal to roughly a 30,000% production increase in just 60 years. To put things in further perspective, by 1910, the U.S. was producing enough coal each year to cover the entire area of Manhattan with a 21-foot tall layer of it!

Since 1890, the U.S. has consistently ranked among the top three global producers of coal in terms of total output, and the graph below shows how the U.S. ranked relative to other leading coal producers in terms of total output over roughly a 30-year period.

Despite their contributions to industrialization and the modernization of America, however, coal and other fossil fuels have taken a huge toll on our planet's health. The CO2 emitted by the burning of fossil fuels is rapidly changing the climate. On top of this, the actual process of mining coal has had significant impacts on the Earth's surface, which can be seen in the thousands of square miles of forests that have been destroyed due to careless mining practices. And burning coal is harmful to the health of humans and other animals, as it puts toxins into the air we breathe, and it can create a variety of respiratory and neurological problems in individuals who reside in areas of high exposure.

Fortunately, we are adapting. Development and investment in clean renewable energy is growing at a blazing pace. As of last year, investments directed into clean energy annually is now double the amount of money being put into fossil fuels. Investment in solar energy alone is predicted to surpass coal investment within the next 3-4 years. As prospects for renewable energy is on the rise, the outlook for coal is dimming, and fast.

Fifty Coal Companies File for Bankruptcy

Earlier this year, Peabody Energy, the largest private coal company in the world, became the 50th U.S. coal company to file for bankruptcy in the last four years. This is significant because Peabody alone is responsible for one-fifth of all U.S. coal production. Three of the bankrupt coal companies rank among the top five largest in the U.S; Together, Arch Coal, Peabody Energy, and Alpha Natural Resources produced 40% of all U.S. coal output in 2014, and each company has filed for bankruptcy within the past year.

The graph immediately below shows the number of functioning coal mines in the U.S. between 2005 and 2014, and illustrates the struggles that coal is facing. New investment in the coal industry has been declining for the past several years, and many coal mines have had their operations suspended or have been closed altogether in an effort to cut costs and reduce debt. The number of operating U.S. coal mines decreased by more than 30% in less than a decade.Active Coal Mines

Jon Eaves, CEO of Arch Coal, stated that his company's decision to file for bankruptcy was based on a need to firm up its balance sheet and improve its financial standing. He also acknowledged the presence of many difficult economic challenges that the entire coal industry is facing. In an April news release, Peabody Energy cited an "unprecedented industry downturn" as the reason why it filed for Chapter 11 Bankruptcy, suggesting that the main factors driving the current industry contraction are related to shrinking margins caused by falling commodity prices, uncertainty about the future of China's economy, and strict regulatory policies toward mining.

Another important factor depressing coal is abundant natural gas. While still a fossil fuel, natural gas production in the U.S. due to advances in hydraulic fracturing (or "fracking") techniques have surprised even some of the experts. And it should also be noted that new and tighter government regulations as promulgated by the Environmental Protection Agency (EPA) have increased costs of compliance for coal companies. Filing to reorganize under Chapter 11 buys time to allow for voters to potentially elect a president whose administration may be friendlier toward coal.

What About Jobs?

This next graph offers a direct comparison between the total employment in the solar energy and coal industries from 2008 to 2014. The number of employees working within the solar industry has quadrupled over the past several years, while employment in the coal mining sector has declined from about 90,000 workers to roughly 75,000 workers. It is important to remember that solar energy is only one of several types of clean energy. There are now close to 90,000 jobs in the wind energy sector as well, and this number represents a 20% rise in just the last year.Energy Employment

Although the coal industry fueled the industrialization of our country and many others, decades of burning fossil fuels have done irreparable damage to the Earth's atmosphere as well as its surface. If we continue with the ways of the past, we may drive our own species (humanity) and many others to extinction. Fortunately, the costs to produce cleaner energy are falling fast. Prices are very comparable in certain markets, but not all; even so, more and more U.S. consumers are recognizing the destructive nature of burning fossil fuels and are willing to pay a little more for clean energy.

Over the past five years, falling commodity prices and general economic uncertainty have forced several of the top coal producers in the U.S. to file for Chapter 11 bankruptcy. Coal firms have shut down hundreds of mines, and employment in the industry has been steadily decreasing. Meanwhile, the clean energy sector, especially solar and wind power, have been experiencing a boom, with significant growth in employment numbers and investment dollars. And the cost of clean energy continues to fall, as companies develop more efficient systems and technologies to bring sustainable energy to consumers. Many countries such as Sweden and Denmark have committed to establishing entirely "green" economies, and they are already seeing benefits in the form of decreased pollution and smaller carbon footprints. One day, relatively soon, the global economy will be powered entirely by sustainable renewable energy sources.

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: July 18, 2016