Morgan Stanley thinks coal's post-election optimism is "overdone."
In a Dec. 15 post-election research note, Morgan Stanley warned that several headwinds will limit the coal sector's response to recent price surges. The report said that rising natural gas prices are expected to boost coal in 2017 but added that most of those gains should be lost by 2018 due to new generation from gas and renewables and from economics-driven power plant retirements.
Pointing out that coal equities outperformed the broader market by 6%, the report concludes that, while pricing has likely bottomed, sustainable upside is limited.
"Our fundamental analysis of power generation economics shows that longer-term coal simply cannot compete with natural gas or renewables (even on an unsubsidized basis), regardless of any changes made to environmental regulations," the report said. "As a result, after a one-year increase in coal consumption in 2017 due to higher gas prices, we expect coal's structural decline to continue, and see natural gas as a relative winner."
The report forecasts a 14% to 17% price downside to Powder River Basin coal and a 5% to 18% price downside to Appalachian coals by the second half of 2017. Morgan Stanley also forecasts that Western coal will likely stand to benefit most from higher gas prices while Eastern coal will "remain largely out of the money."
For new coal power plants to beat out a natural gas plant, the report said, natural gas prices would need to rise to $6.50/MMBtu on a sustained basis. That, Morgan Stanley reported, is not likely.
"While rolling back environmental regulations might save some coal plants on the margin, it doesn't do much to change the overall outlook," the report said. "In order to save coal, gas prices need to move higher. From a new build standpoint, constructing a new coal plant has a levelized revenue requirement that is substantially above that of a new natural gas-fired plant. As a result, unattractive economics are likely to continue to prevent the construction of new coal power plants in the U.S."