Why I'm Bullish On Coal Stocks

Coal is a hard, black byproduct of fossilized plants. Coal accounts for 25 percent of global energy consumption, significantly less than crude oil (39 percent), but more than natural gas (22 percent). Coal is cheap, abundant compared to crude oil and natural gas and used mainly in electricity production and in the manufacturing of steel.

If you are familiar with Hubbert’s Peak Oil Theory, then I do not need to tell you why sources of cheap energy are so important and growing increasingly so. If you are unfamiliar with Hubbert’s Peak Oil Theory states that for any given area, the rate of petroleum production tends to follow a bell curve. In other words, early in the curve (pre-peak), the production rate increases due to the discovery rate and the addition of infrastructure. Late in the curve (post-peak), production declines due to resource depletion. Beleivers of Peak Oil Theory assume that production and reserves of light sweet crude oil have already peaked or are going to in the very near future. Hence the excitement over uranium and alternative energy sources such as solar.

As prices for crude oil, natural gas and even uranium have risen more than 100% in the last year, coal and coal stocks have not been part of this rally. However, I think that coal and coal stocks will not have to wait much longer for their turn to run.

Reasons

According to the EIA, 67% of the world’s recoverable reserves are located in four countries: the United States (27 percent), Russia (17 percent), China (13 percent), and India (10 percent). China and India account for 70 percent of the projected increase in world coal consumption and much of the increase in their demand for energy, particularly in the industrial and electricity sectors, is expected to be met by coal.

China

For the first time in history, it is predicted that China will purchase more coal than it exports. “China will become a net importer of coal in the next one to two years, Feng Fei, director of the industry department at the State Council's Development and Research Center, told reporters at an industry conference. This prediction was supported by Jing Tianliang, general manager of China National Coal Group Corp (ChinaCoal), who told reporters that rising imports were mainly due to increased demand in China.”

In fact, "China may see a pure coal import this year and the domestic coal price has room for further inflation," Zhao Jianian, deputy secretary-general of the Coal Industry Economic Research Association, said”. With China’s GDP predicted to grow at 9 -10% through 2009, its coal consumption is expected to reach 2.87 billion tons in 2010, 270 million tons more compared with the 2.6 billion tons production scale planned.

India

India's demand for coal may exceed two billion tonnes a year by 2031-32, up from about 460 million tonnes a year now according to the country's minister for coal, Dasari Rao.

United States: The U.S.A. has already passed peak production of high quality coal in 1990 in the Appalachian and the Illinois Basin. Total U.S. coal production capacity has been in decline since 1999. Based upon mine level reports collected by the EIA, U.S. coal production capacity was only 2 million tons per year higher in 2004 than in 2000 (Energy Watch Group).

Global Energy estimates "ready reserve" coal capacity increased modestly in 2005 (by 2%), but that the increase is nearly all attributable to addition of more western coal capacity where transportation constraints continue to exist. U.S. coal production may have to increase by as much as 4% per year for the next 20 years to achieve fuel diversity objectives and to meet expected demand from power generators. The diminishing productive capacity of certain coal basins is leading to growing imports of coal to the U.S. Steam coal imports are increasing at a rate near 20% per year while domestic coal production is up 1% per year. (Global Energy)

The U.S. Department of Energy's Energy Information Administration projects consumption rising from 1.1 billion tones in 2003 to 1.8 billion tons in 2030.

Historically, estimates of world recoverable coal reserves, although relatively stable, have declined gradually from 1,174 billion tons at the beginning of 1990 to 1,083 billion tons in 2000 and 1,001 billion tons in 2003. Recent assessment of world coal reserves includes a substantial downward adjustment for Germany, from 73 billion tons of recoverable coal reserves to 7 billion !
tons.

Why Use Coal?

At current production levels, proven coal reserves are estimated to last 155 years. In contrast, proven oil and gas reserves are equivalent to around 41 and 65 years at current production levels respectively.

Coal is the safest fossil fuel to transport, store and use.

Coal is the single largest fuel source for the generation of electricity worldwide.

Over 23% of primary energy needs worldwide are met by coal.

70% of global steel production depends on coal feedstock, with almost 600 million tones of coal being used in steel blast furnaces.

Coal is cheaper than natural gas.

Why Not use coal?

Burning coal produces Co2 and other greenhouse gas emissions that contribute to global warming. Burning it produces enormous amounts of ash, and flue gasses containing pollutants such as sulphur dioxide, nitrogen oxides, sulphuric acids and arsenic. It also produces almost twice as much carbon dioxide as gas (for the same heat). Solutions for turning coal into a more energy efficient and lower emission fuel are being worked on right now. For example, Clean Coal Technologies (CCT’s) are technological options that reduce emissions, waste and increase the amount of energy gained from each tonne of coal. Particulates from coal can be controlled by electrostatic precipitators (ESP) and fabric filters. Finally, flue gas desulphurization [FGD] systems can be used in coal-fired power stations to remove as much as 99% of oxides of sulphur which are responsible for acid rain. Progress is being made each day to come up with methods and technologies to reduce the emissions and particulates emitted while burning coal, so the demand for coal can only increase as these methods and technologies are perfected.

Who’s on your Side?

Billionaire Wilbur Ross Jr. formed International Coal Group (ICO) in 2004.

In 2006 Carl Icahn announced that he owns 1.36 million shares of Consol Energy (CNX), a company that mines, prepares and sells steam coal.

Hedge funds Third Point LLC and BP Capital own stock in Massey Energy (MEE), the largest producer of Central Appalachian coal.

Analyst Comments

In a recent report published in April 2007, Citigroup mining analysts John H. Hill and Alexander Hacking suggested that, "Now is probably the time to build positions (in coal stocks), although risk-adverse investors may want to wait until after 1Q earnings."

"The coal sector in China has undergone a change," said Mark Mobius, who oversees $30 billion at Templeton Asset Management in Singapore. Mobius says Asian coal prices may surge 42 percent in five years, bolstering China Shenhua Energy, the biggest coal company, China Coal Energy and Yanzhou Coal Mining (YZC). (April 2007)

Speaking at the December 14, 2006 Coal Trading Conference in New York Gary Hunt, President of Global Energy Decisions, stated that “The coal supply chain is pretty poorly positioned for sustained growth,” and that substantial investment is needed to meet projected coal demand from the electric power sector.

“The U.S. seems set on working toward energy independence and coal is by far the most economical option,'' said John Piccard, a senior analyst at Jersey City, New Jersey-based Lord Abbett & Co., which holds a 2.3 percent stake in coal producer Massey Energy Co. “Investors value coal reserves at a fraction of oil deposits. Peabody Energy's reserves are worth 7 cents per million British thermal units, a measure of energy content, based on the company's market capitalization. At today's share price, Exxon Mobil Corp.'s oil deposits are worth $3.16 a million British thermal units. That gap may narrow, raising the value of coal relative to oil, as more plants are built that allow coal to compete with oil,” Piccard said.(July 2006)

“Too much of a discount is being paid for coal equities at the moment given their inherent energy value and long-term ability to provide growing returns,'' said Kevin Bambrough, who helps manage C$3.8 billion at Sprott Asset Management Inc. in Toronto. Coal producers over the next decade are more likely to generate “superior returns over oil companies,'' he said. (July 2006)

Because “coal is the cheapest, most abundant energy source,'' from North America to China, “the surge in oil has encouraged people to plan new coal-fueled power plants and to start using conversion technologies such as coal-to-diesel,'' said Richard Price, an investment banker at Westminster Securities in St. Louis. (August 2006)

Bullishness Expressed by Companies

In 2006, GE (GE), Siemens (SI) and Alstom, which are three of the world's big makers of turbines for electricity generation, told The Financial Times that they were seeing a shift in their orders to steam turbines for coal-fired utility plants from natural-gas turbines. According to the three, coal-powered units will make up about 40% of all orders for electricity turbines in the next 10 years, with the share for natural-gas-fired turbines falling to 25% to 30% of orders. Between 1997 and 2000, the peak of the move to natural gas for electricity generation, natural gas accounted for 60% to 70% of new electricity power plants. Coal's share was just 20% to 30%.

“Converting coal into liquid fuel or natural gas becomes economical when oil remains above $40 a barrel”, said Stephen Leer, chief executive officer of Arch Coal Inc. (ACI), the second- largest U.S. producer.

"Coal demand continues to set records in the U.S. and globally,'' Greg Boyce, Peabody's chief executive offer, said July 21, 2006 after the company posted a 61 percent gain in second- quarter profit. “The long-term estimate of global coal use continues to strengthen."

Billionaire Wilbur Ross, chairman of International Coal Group Inc., is convinced the search for a cheaper alternative to oil and natural gas will enable coal to outperform oil. "The argument against it is not an economic one. It's about the environment and emissions."

Politics

Using more coal is part of President George W. Bush's initiative to make the U.S. less dependent on imports. U.S. Defense Secretary Donald Rumsfeld in May authorized the Air Force, which burned 3.2 billion gallons of jet fuel last year, all refined from crude oil, to begin testing 100,000 gallons of a similar fuel derived from natural gas and coal. During Bush's reign, Congress already has funneled more than $1.3 billion into “clean coal” research and the $14.5 billion energy bill signed in August promises tax breaks and loan guarantees for the industry, plus more research money.

The U.S. will build plants that increase coal's share of fuel used to generate electricity to 57 percent from 50 percent today, the U.S. Energy Department said in 2006.

Recent Developments

Union-represented workers went on strike on 4th April 2007 at three Foundation Coal Holdings (FCL) (4th largest coal producer in U.S.) Inc. mines in Pennsylvania and Illinois on Wednesday in the first major strike against the coal mining industry in 13 years. Meanwhile, analysts said that unless the strike was protracted, it was unlikely to have a big short-term effect on shipments to power plants. But, if it lasted more than few days, it could boost coal prices.

Summary

The demand for coal is growing each year and so is its importance as crude oil and natural gas prices continue to soar. As governments try to lessen their dependence on conventional oil and gas as energy sources, they will increasingly turn to coal because it cheaper, more abundant and becoming increasingly safer for the environment as new technologies to lessen its emissions are being introduced everyday. I am betting sooner rather later for this sector to take off and some M&A activity won’t hurt either. I’ll have a coal pick for you soon.

Comments

[tblakeslee]

I couldn't disagree more and have shorted coal because it is an environmental disaster. It only seems to be a cheap energy source if you ignore the hidden costs: Worldwide fishing stocks are contaminated with mercury to where, in spite of warnings, one in six pregnant mothers have dangerous levels of mercury in their bloodstreams. Autism is endemic as a result. Also asthma is way up in coal areas. The entire planet is being disrupted by global warming. The Bush administration has been in denial on this problem but the new Democrat committee heads will soon pass carbon and mercury limits which will be a disaster for coal.
The so-called "clean coal" technology is an impractical idea that won't even be tested till 2012. The problem is that 3 tons of CO2 are produced for every ton of coal burned! That's a lot to dispose of. Meanwhile, wind and geothermal power is already selling for 5 cents/kwh and making a nice profit for companies like ORA and Suzilon. How can coal compete with the added cost of disposal of all that CO2?

[igorsky]

Further to thomas Blakeslee's comments, the world has to start shifting to nuclear power. It is the only means to convert hydrocarbon based power plants big time without producing CO2. Solar and Wind power will provide only a small percentage of the world's electric power needs. To quickly arrest the steep growth of CO2 generation and global warming, we need to replace all fossil fuel electric power plants with nuclear. One of the fastest ways of conversion to nuclear is to substitute pebble bed reactors for coal fired plants; their generators can be reused. This will happen, the world has no choice. Coal's will only be good for small application like producing liquid fuel for aviation applications and emergency power. Commuter cars will be electric plug-in types (electric power provided from nuclear plants) to further reduce CO2. Coal, oil and gas value will decline. So will the power of the Middle East, to their pre-OPEC status. Hopefully, so too will terrorist activities. With greatly deminished need for oil, our involvement with the MIddle East will decline.
Nuclear, with fuel recycling, will last longer than oil. The Nevada nuclear waste site will not be needed. New nuclear technologies will make our nuclear fuel last forever. The world has an abundance of uranium and thorium and most deposits are located in countries with stable and peaceful populations - US, Canada, Austalia, India. Long term investments are in uranium and nuclear power industries.

[Wolf Stone]

Hey Unsondl and thomas blakeslee
Regarding the hidden costs of coal, i can only say that cleaner technolgoies are being developed everyday and even though we can utilize some of these cleaner technologies for coal today they do come at a higher price point. However, i beleive that this is a supply/demand sotry and when China switched from being an exporter to an importer, i became a coal beleiver. Unsondl, i know nuclear energy is in vogue now but there is currently a supply demand crunch in that sector (lots of demand and no supply) and so i'm afraid that gap will have to be filled by using cheap thermal coal.

[dcappe10]

Thank you Wolf, I am also a coal believer and would just like to recommend this report to everyone on here. It proved to be very valuable information to me...

www.whiskeyandgunpowde...

Enjoy, Cheers!

[Long-ShortGuy]

Interesting:
<blockquote>As talk of building new power plants rises sharply, so does the cost. In the United States, the work on a new fleet of coal-fired power plants and a revival of nuclear construction after three decades are both looking tougher lately. For example, in late 2004, Duke Energy, one of the largest U.S. utilities and most experienced builders, started planning a pair of coal-fired power plants to replace several built around the middle of the last century, at Cliffside, in North Carolina.

In May 2005, the company told regulators it wanted to spend $2 billion to build twin 800-megawatt units. But 18 months later, in November 2006, Duke said that it would cost $3 billion. Then the state utility commission said to build only one of the plants.

And in May of this year, Duke said that would cost $1.83 billion, an increase of more than 80 percent from the original estimate. Duke's experience may be extreme, but it is hardly isolated.

"There's real sticker shock out there," Randy Zwirn, president of the Siemens Power Generation Group, said in an interview. He estimated that in the past 18 months, the price of a coal-fired power plant had risen 25 percent to 30 percent.</blockquot...

Source:
Price of new power plants rises sharply

[Georealist]

Coal will be able to compete because...contrary to the elitist conceits of people like Blakeslee...when oil and gas are either depleting at record rates or are being kept for internal use by previous exporting countries no one will care much about its issues as a polluter. At least no one who wants to be reelected by a freezing or sweltering constituency. Buy coal and uranium my friends..or invest in a few weighty books by Thoreau and Emerson and pretend your above it all...may learn macrame as a sideline.

[LavoCorp]

I agree with Georealist. Do not let your sense of personal ethics cloud your investment sense. Commodities cycles take years to play out and coal still has a long way to go. Shorting coal now is very foolish

[jimarb]

GEE guys no one said anything about coal to liquids - the Air Force has already used coal to jet fuel in a B-52 and Sasol in South Africa has been making diesel from coal for years - the Germans in WW II made diesel from coal - lots of good things can be made from coal - don"t get caught up in the " GREENIES " assessment of things - most of them are always first in chow line never made a payroll - YOU MUST THINK AND KEEP UP WITH NEW AND OLD DEVELOPEMENTS