Natural Gas Will Never Knock Out Coal

Fans of Muhammad Ali should have an appreciation for the coal story. Much like the Rumble in the Jungle, where an older Ali faced a younger opponent in George Foreman, the coal industry has found itself up against a younger, cleaner opponent in natural gas. And despite the overwhelming odds in favor of the young upstart, coal, like Ali, is poised to come out of this fight as the reigning champion.

Let's look at the scorecards and see why coal will take this fight in the long run.

The greatest in the world ...
To look only at the U.S. and determine the prospects of coal would be very misleading. While low domestic gas prices have dragged the price of coal down with them, the same can't be said overseas, for two distinct reasons:

  • Natural gas requires a much more robust infrastructure to be competitive, normally consisting of large pipeline networks and sophisticated liquefaction and regasification terminals, where coal can much more easily use existing roads, rail lines, and ports.
  • In several countries outside North America, natural gas prices are indexed to oil on a BTU equivalency. That has given North America a distinct advantage in selling natural gas, but it also enables coal to compete on the international stage much better than here.

Looking at the global market for coal, it appears there are no signs that natural gas will be able to take the title from coal. An International Energy Agency report back in January estimates that coal will pass oil as the most used energy source by 2017. In fact, the report projects that the U.S. will be the only country that will see its coal use decline between now and 2017. Just like almost every story in the energy space, the major drivers of demand will be China and India. Analysts project that the two countries' total coal consumption for electricity generation will be almost double that of all member nations of the Organization for Economic Cooperation and Development, combined. Furthermore, coking coal for steel production should see a substantial gain as well. Total steel demand between now and 2020 is expected to double in India and continue to grow steadily in China.

With so much demand headed overseas, several coal companies in the U.S. will need to boost their export capacity. Peabody Energy (NYSE: BTU  ) has a deal in place with Kinder Morgan Energy Partners (NYSE: KMP  ) to use its export terminal in the Gulf of Mexico and on the East Coast. This agreement will increase Peabody's export capacity in the Gulf region to a range of 5 million to 7 million tons per year. Also, as one of the leading exporters of U.S. coal, Alpha Natural Resources (NYSE: ANR  ) has the export capacity for about 25 million tons per year, which provides it plenty of room to run, considering the company exported only 14 million tons in 2011.

... just not in the United States
Despite the exploding global demand, the IEA does recognize that the U.S. may just represent a round that coal can't win. Based on its projections, total coal consumption in the U.S. will decline by 14% by 2017. So despite the massive growth worldwide, shrinking domestic demand will force American coal companies to compete with overseas players and could potentially squeeze out some of the higher-cost regions such as the Appalachian Basin. Another reason this region will be on notice is that the sulfur content in Appalachain coal is 50% to 275% greater than coal from the Western Basins. As environmental regulations tighten on sulfur dioxide emissions, these types of coal will fall out of favor for domestic electricity generation. This should be a word of warning for Appalachian strong companies such as Arch Coal (NYSE: ACI  ) , which has about one-third of its total reserves in the Appalachian region.

We're starting to see this trend play out already, the US Energy Information Agency recently reported that natural gas has been rapidly closing the gap with coal for the top fuel source for electricity in the United States.

Source: US Energy Information Agency

According to Exelon (NYSE: EXC  ) CEO Christopher Crane, this trend will probably continue. In a recent interview with The New York Times, he expects that 19,000 megawatts of power from coal-fired plants will be shut down because of tightening environmental regulations on emissions. This will not only help his company, which is struggling because of low natural gas prices as well, but it will also further chip away at coal's slim lead over natural gas in the United States.

What a Fool believes
There's plenty of room to grow in the coal industry, but just like Ali's Thrilla in Manila, U.S. coal companies will fight their biggest fights overseas. Peabody Energy will have an easier time than most because it has already established a strong global presence. Peabody already has mining operations in Australia and has a joint venture with a Mongolian mining company to supply China in one of the most cost-effective ways possible. While these may be only smaller parts of the company's overall holdings, they will help to drive better relations in the Asia-Pacific market for years to come. Our new premium report on Peabody Energy looks at how this company will capitalize on U.S. coal supplying the world. Don't miss out on this invaluable resource -- simply click here now to claim your copy today.


Read/Post Comments (5) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2013, at 4:57 PM, gasblogger wrote:

    Coal will always be around, but will be the old man in the corner. It is being replaced, as will a lot of petroleum. This will take decades, but it is happening now. All nations want to replace dirty coal, and want cleaner, cheaper fuel. Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, trucks, vans, buses, locomotives, aircraft, ships, tractors, engines of all kinds. It costs far less. It will help keep us out of more useless wars, where we shed our Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, trucks, vans, buses, locomotives, aircraft, ships, tractors, engines of all kinds. It costs far less. It will help keep us out of more useless wars, where we shed our blood and money. It is used to make many products, and will bring jobs that boost our economy. It lowers CO2 emissions, and pollution. Over 6,000 select natural gas story links on my free blog. An annotated and illustrated bibliography of live links, updated daily. The worldwide picture of natural gas. Read in 78 nations. ronwagnersrants . blogspot . com

  • Report this Comment On March 30, 2013, at 10:15 PM, richard4850 wrote:

    China will consume more coal but at some point they have to ask themselves why their air pollution is 3-4 times worse than the air in NYC or L.A.

    As China burns more coal each year than the year before and has more cars on the road by an increase of 10 million per year they have a real problem.

    Tourism will be driven away if you are unable to see clearly or breathe the air.

  • Report this Comment On March 31, 2013, at 1:03 AM, Mark2013 wrote:

    Coal will be used a long time and companies like ANR are already using it for various things once never thought possible and even if USA banned use of coal, companies listed here would survive but I believe going by low stock price far under book, ANR is best positioned to make shareholders at $5 or less 300% return so u can imagine those of us with shares at lows and these prices what rewards we get long term IMO

    I believe ANR and other coal companies invent an even knew huge way of using clean coal soon imo in a form most needed in a future material JMO and am long ANR and others listed here.

  • Report this Comment On April 02, 2013, at 7:18 PM, agwisreal wrote:

    Reduced tourism will be the least of China's worries. Global warming is real and it does more damage than the coal is worth*, by a wide margin. Almost every nation can treat this as an externality. But not China, for she is so big that her own share of the damage from the extra CO2 is bad enough to make coal uneconomical compared to natural gas, or, in selected situations, wind, solar, or nuclear.

    *The profit from using coal rather than natural gas is diminished by fracking, which makes the competing fuel, natural gas, cheaper.

  • Report this Comment On April 03, 2013, at 11:13 AM, JeanDavid wrote:

    The more carbon we burn, the sooner the end of the world as a place suitable for human habitation will be.2050 is not that far in the future, and if I am too pessimistic, well 2075 is not that far away either. Anyone out there have grandchildren? Do you care about them? What are you doing to make this planet survivable for them?

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