November 19, 2013 / 7:10 PM / 6 years ago

With 'bearish' outlook, Chanos shorting U.S. coal sector

NEW YORK (Reuters) - Coal stocks will continue to be unattractive investments due to withering competition from shale-derived natural gas and slipping demand for steel, especially in China, famed short-seller Jim Chanos of Kynikos Associates said on Tuesday.

Jim Chanos, Founder and Managing Partner of Kynikos Associates LP speaks at the Reuters Global Investment Outlook summit in New York, November 19, 2013. REUTERS/Mike Segar

Chanos said he is “very bearish” and “pretty much short” all but one of the large leveraged coal producers in the United States. He declined to mention specific companies, but the only large U.S. coal stock Kynikos is not shorting is Arch Coal Inc, according to regulatory filings.

Top names in the industry include Alpha Natural Resources and Peabody Energy Corp, which owe more than their market value, as well as Consol Energy Inc and Walter Energy Inc.

“We’re even seeing slipping demand for coal in China due to pollution concerns,” Chanos said at the Reuters Global Investment Outlook Summit in New York.

Coal companies produce thermal coal, which is used to generate electricity, and also higher-margin metallurgical coal, which is used to make steel.

With the U.S. shale gas revolution cutting the price of natural gas, U.S. power plants have been burning less coal, sharply denting demand and thermal coal prices. As recently as 2007, coal was used to generate roughly half of all the electricity in the U.S. Today, cheap natural gas has gained ground, producing 30 percent of power to coal’s 37 percent, according to the latest statistics from the U.S. Department of Energy.

Patriot Coal Corp, for instance, declared bankruptcy last year, saying slipping demand and skyrocketing labor costs harmed profitability.

Chanos said he has both long and short plays in the natural gas market, which has seen wild swings in commodity prices and stock prices for producers in the past year due to a supply glut.

Meanwhile, a glut of steel in China and other fast-growing regions has eroded demand for metallurgical coal, and environmental degradation has prompted Chinese officials to consider power generation alternatives.

The Obama administration in September announced regulations setting strict limits on the amount of carbon pollution that can be generated by any new U.S. power plant. The proposed regulations, which the coal industry has vowed to fight, would make it nearly impossible to build a new U.S. coal plant without using carbon emission-capturing technology that power producers say is unproven and uneconomical.

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Reporting by Ernest Scheyder; Editing by Phil Berlowitz

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