Coal has been used for nearly as long as mankind has thrived,
for everything including cooking, making clay pots, heating, as
fuel to run steam-powered trains, to make weapons, heating homes,
generating electricity, powering railroads and boats, and fueling
factories.
Today, coal is burned as fuel or gasified to create a synthesis gas
(syngas) that can then be used as a feedstock for the production of
chemicals, fertilizer and electric power. Coal is also used for
producing heat through combustion.
The USA, Russia, Australia, China, India and South Africa have the
largest coal reserves in the world. Coal is produced in 25 states
in the US spread across three coal-producing regions, but majority
of the current production originates in just five states: Wyoming,
West Virginia, Kentucky, Pennsylvania and Montana.
The most recent figures available from the U.S. Energy Information
Administration’s (EIA) report as of January 1, 2011, show that
America's estimated recoverable reserves of coal stand at 261
billion short tons.
Like all commodity sectors, the fortunes of the coal industry are
also closely tied to the health of the global economy. The
post-recession demand recovery in the U.S. has helped improve the
industry’s earnings power, with most coal companies solidly
profitable in 2010. This uptrend in demand, largely driven by the
improvement in the global economic activity, rebound in domestic
power demand, favorable weather patterns and soaring coal demand
from Asian countries, also continued into 2011.
Coal Dominates U.S. Power Generation: As we already know,
coal as a major source of fuel for power generation dominates the
Utility industry. Coal is used to generate about half of the
electricity consumed in the United States, and is also the largest
domestically-produced source of energy. Electricity generation
absorbs about 93% of total of U.S. coal consumption. The reason is
simple: coal is by far the least expensive and most abundant fossil
fuel in the country.
However, the EIA estimates U.S. coal consumption for electricity
generation to decline by 16 million short tons (MMst) or 1.6% in
2011. According to EIA, the modest growth in total electricity
generation in 2011 will be more than satisfied by increases in
generation from natural gas and renewables other than
hydropower.
Projected increases in generation from natural gas, nuclear and
non-hydro renewables, combined with lower electricity consumption,
contribute to an additional 4.6% decline in electric power sector
coal consumption in 2012.
By contrast, petroleum and nuclear power as sources of power
generation have been losing market share, displaced by the strong
growth of renewable sources of generation and natural gas-fired
generation. Petroleum is losing out to coal because it is becoming
increasingly expensive.
Not Just Electric Generation: Electricity generation is
just one use of coal in the United States. In addition,
manufacturing plants and industries use coal to make chemicals,
cement, paper, ceramics and metal products, to name a few. Methanol
and ethylene, which can be made from coal gas, are used to make
products such as plastics, medicines, fertilizers and tar.
Certain industries consume large amounts of coal. For example,
concrete and paper companies burn coal, and the steel industry uses
coke and coal by-products to make steel for bridges, buildings, and
automobiles.
Coal as an Input for Steel Industry: Due to its heat
producing feature, today, hard coal (metallurgical or coking coal)
forms a key ingredient in the production of steel. Nearly 70% of
global steel production depends on coal. The demand for
metallurgical coal continues to increase based on the recovery of
the global steel industry.
Coal Trade
About 9% of U.S.-mined coal is exported to some 40 countries,
including Canada, Japan and Western Europe.
According to EIA’s “Short-term Energy Outlook,” U.S. coal exports
rose to 54 MMst during the first half of 2011, the highest since
1982, representing about 35% compared with the same period in 2010.
U.S. coal exports likely remained elevated in the second half of
2011, reaching an annual total of 102 MMst. Exports are expected to
decline to 91 MMst in 2012, as supply from other major
coal-exporting countries recovers from disruptions.
Demand for U.S. coal was also strong in the third quarter. This was
mainly driven by increased coal imports in China, South Korea,
India and Europe. China net coal imports just hit an all-time high
in September. South Korea's coal imports also have set records
recently, and India's thermal coal imports are up more than 40%
year-to-date.
Additionally, coal trade in the U.S. continues to benefit from
favorable prices for the shipments made. Per the EIA’s latest
report, average delivered coal prices to the electric power sector
have increased steadily over the last 10 years by an average of
6.7% each year. The EIA sees this trend continuing in 2011, largely
because of a rise in transportation costs.
The projected average delivered coal price to the electric power
sector, which was $2.26 per MMBtu in 2010, rises to $2.41 per MMBtu
in 2011 and $2.44 per MMBtu in 2012.
Demand Upsurge in Asian Countries: The increases in coal
demand in Asian economies like China and India have been a key
price driver since the end of the recession in 2009. We expect this
trend to continue in future mainly due to the growing energy needs
in India, China, South Korea and Europe.
China, the world's fastest growing major economy, has massive coal
reserves. However, its domestic coal production continues to fall
short of meeting its rapidly growing demand for coal, resulting in
the continuous rise in coal imports. China has since overtaken the
U.S. as the world's largest consumer of coal.
Similarly, in India, the rising population and economic growth
continue to call for increased coal consumption for electricity
generation. Coal accounts for nearly 55% of the country's energy
consumption needs. The last four decades have seen the country’s
commercial energy consumption rise by about 700%. Going forward,
India plans to double electricity generation capacity by 2012,
which could see the country importing in excess of 200 million tons
of coal.
Given the growing demand from the fast-growing Asian economies, we
find companies exporting coal to the emerging regions attractive
for investment. Some of the names are Peabody Energy
Corporation (BTU) and CONSOL Energy Inc.
(CNX).
Other key thermal coal players who stand to benefit from the
increasing demand for coal include James River Coal
Co. (JRCC) and Cloud Peak Energy (CLD).
Apart from this, certain coal master limited partnerships (MLP)
including Penn Virginia Resource Partners L.P.
(PVR), Natural Resource Partners L.P. (NRP) and
Alliance Resources Partners L.P. (ARLP) are also
good investment bets for people seeking exposure in the coal
sector.
Common Threats
Coal is plentiful and fairly cheap relative to the cost of other
sources of electricity, but its use produces emissions that
adversely affect the environment. Coal emits sulfur dioxide,
nitrogen oxide and mercury, which have been linked to acid rain,
smog and health issues. Coal also emits carbon dioxide, a
greenhouse gas that contributes to climate change.
Coal accounted for 37% of the total U.S. emissions of carbon
dioxide released into the Earth’s atmosphere in 2010. Without
proper care, coal mining can have a negative impact on ecosystems
and water, and alter landscapes and scenic views.
Environmental Legislations: Coal has been losing its
importance as a fuel source over the last few years, particularly
in the U.S., vis-à-vis other sources that have a lesser impact on
the environment. Concerns on the emission of greenhouse gases and
global climate change have resulted in the formulation of new
legislations and policies which emphasize on the use of
environment-friendly fuel sources, particularly in the power
sector.
This has considerably slowed the expansion of coal-fired capacity
in the power sector, with utility companies now building new
natural gas-fired plants and resorting to alternative sources of
energy generation like wind, solar and hydro power. It remains to
be seen what impact the Japan disaster will have on the industry’s
fortunes going forward. But it has to be a net positive.
Natural Gas Substituting Coal: A major substitute for coal
in energy generation is natural gas. Coal is being dumped in favor
of natural gas, which due to extensive exploration and production,
has a significantly lower price than in the past. Natural gas is
usually an attractive choice for new generating plants because of
its relative fuel efficiency, low emissions, quick construction
timelines, and low capital costs. Cheaper natural gas and large
coal inventories have greatly hurt the U.S. and European thermal
coal demand in 2009.
Electric generation through gas-fired plants is likely to become
more competitive over the coming years given its abundant domestic
availability and the threat of regulation hanging over the Coal
Mining industry. Large electricity generators in the U.S. like
American Electric Power (AEP), Exelon
Corporation (EXC), FirstEnergy Corp. (FE)
and others are turning to natural gas for additional electrical
capacity.
Not only coal, natural gas also substitutes the use of renewable
and nuclear energy for electricity generation, as new natural
gas-fired plant is much cheaper to build than new renewable or
nuclear plants.
Competition from Alternative Energy Sources: Apart from
natural gas, the coal industry has been losing a major share of its
electric generation demand to renewable sources of energy like
wind, solar and hydro power. Generation from renewable resources
grows in response to key Federal tax credits, but it is expected to
be lower in 2011 than in 2010 because of lower natural gas prices
and higher costs for new wind power plants.
Growth in renewables has also been supported by the many State
requirements which stipulate the installation of renewable sources
of electricity generation as mandated by Renewal Energy Standards
(RES). The share in energy generation of renewable fuels (including
conventional hydro) is projected to grow from 11% in 2009 to 14% in
2035, as per EIA’s long-term outlook.
Conclusion
Though there is ample pressure from legislations and competition
from natural gas and renewable energy sources, we believe the
global power industry will continue to depend on coal for a large
part of its generation. Coal as a fuel source will continue to
power the growth in emerging nations like China and India, both for
utility companies and steel makers.
The EIA estimates that the United States has enough coal to last
for more than 200 years at current coal consumption rates. This is
promising because, in addition to the many existing ways to use
coal, the future holds new methods and potential for growth.
Products from coal may soon be part of communications and
transportation systems, computer networks and even space
expeditions.
In addition to these new and increased uses of coal, new
technologies will continue to enhance the ability to identify the
shape and composition of untapped coal reserves. New technologies
will also continue to improve the effects of the production and use
of coal on the environment.
For example, the U.S. Environmental Protection Agency's Coalbed
Methane Outreach Program seeks to work with coal companies to
reduce methane gas emissions associated with coal mining.
These new technologies focused on achieving near-zero emissions
open up avenues for potential long-term industry growth. Clean coal
technology development in the U.S. also has funding earmarked under
the American Recovery and Reinvestment Act of 2009. This is an
encouraging sign for coal producers.
AMER ELEC PWR (AEP): Free Stock Analysis Report
ALLIANCE RES (ARLP): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis Report
CLOUD PEAK EGY (CLD): Free Stock Analysis Report
CONSOL ENERGY (CNX): Free Stock Analysis Report
EXELON CORP (EXC): Free Stock Analysis Report
FIRSTENERGY CP (FE): Free Stock Analysis Report
JAMES RIVER CL (JRCC): Free Stock Analysis Report
NATURAL RSRC LP (NRP): Free Stock Analysis Report
PENN VA RESRC (PVR): Free Stock Analysis Report
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