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Coal on the Wrong Side of Energy's Future

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The U.S. coal industry continues to struggle with falling demand domestically, and low prices for exports. New emissions regulations have caused the closure of hundreds of coal plants in the last few years, and the low price of natural gas has been a death knell for companies like Patriot Coal, which couldn't find low cost supply.

Long-term, there's nothing that's going to stop the trend of falling consumption domestically. It may ebb and flow from month to month, but we have plenty of natural gas, and renewable alternatives are growing like a weed.

US Coal Consumption Chart

US Coal Consumption data by YCharts

Most investors hope that exports will make up for the loss of domestic consumption. The problem is that exports aren't growing nearly as quickly as consumption is falling.

In 2012, the U.S. consumed 112,465 short tons less coal than the year before according to the EIA. Exports jumped 24%, a solid growth rate, but only grew by 22,415 short tons. That means production, and overall demand, fell by 90,050 short tons, or 7.2% from the year before. 

Yes, we're seeing a resurgence in demand in 2013, but the long-term trends are working against coal. Eighty-two percent of all new generation built in the first quarter was renewable energy, and this will be the biggest obstacle to coal's future, now that renewable sources are lowering costs. Even the EIA is expecting very little new generation to hit the grid in the next three decades.

Source: U.S. Energy Information Administration 

According to the EIA, there's a good reason new coal plants aren't being built. It's simply too costly to build them compared to other energy sources.

Source: U.S. Energy Information Administration

Natural gas is the biggest power source coal needs to worry about short-term domestically, and it's one energy source we have an abundance of. Longer term, renewables will play an expanding role and, as they do, coal will fall further into the background.

Overseas hope
The big hope is that coal exports will grow, and companies will be able to replace U.S. demand with demand from China and India. Arch Coal (NASDAQOTH: ACIIQ  ) hopes to quadruple exports by 2020 after inking a deal to ship up to 10-million tons to the Gulf Coast annually. Alpha Natural Resources (NASDAQOTH: ANRZQ  ) is expecting to double exports this year as U.S. demand falters. Finally, Peabody Energy (NASDAQOTH: BTUUQ  ) has an agreement with Kinder Morgan Energy Partners to help increase the company's export capacity by 5 million to 7 million tons starting next year.

All of this export hope rides on the assumption that demand will continue to increase in India and China. Short term, that may be true, but China is likely going to be the biggest wind and solar installer in the world this year, and it has never liked a long-term import strategy. According to the China Coal Industry Association, Chinese coal consumption only increased 1.5% in the first quarter, and the country's five-year energy plan aims to reduce coal electricity from 79% of production, to 65% by 2015. 

The chairman of Coal India -- the world's largest coal producer and supplier of 90% of India's coal -- recently said that his company would only need 5-6 million metric tons of coal imports this year, from a previous view of 35-million metric tons. In an incredibly ironic move, the company is also installing solar energy to provide power for its facilities, and is considering distributing  solar, as well. There's an abundance of sun in India and, with a shaky electricity infrastructure, it's solar power, not coal, that will be the country's future.

Coal on the wrong side of the future
The coal industry is simply on the wrong side of history. Coal powered the country for a century, and helped fuel growth in emerging markets, but demand will fall in the future, and investors will be left with scraps, as companies fall. Investors would be wise to stick with emerging markets like shale drilling, ultra-deepwater drilling, and renewable energy. These are the energy sources of the future, and coal is the energy of the past.

A better way to play energy

The coal industry in the United States has been in a state of flux since the arrival of a cheaper alternative for energy production: natural gas. Exports are becoming a much bigger part of the domestic coal landscape, and Peabody Energy has deals in place to get its cheaper coal from the Powder River and Illinois basins to India, China, and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is perhaps most worthy of your consideration. Don't miss out on this invaluable resource -- simply click here now to claim your copy today.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

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 June 15, 2013, at 11:20 AM, prginww wrote:

    Graet articles coming out of Motely Fool AFTER these stocks have dropped over 75% -- a contrary indicator ?

  • Report this Comment On June 15, 2013, at 11:23 AM, prginww wrote:

    This is just more peopaganda to control what we do

  • Report this Comment On June 15, 2013, at 11:37 AM, prginww wrote:

    Coal is dead dinosaurs...

  • Report this Comment On June 15, 2013, at 4:27 PM, prginww wrote:

    This author painted the completely wrong picture on coal and distorted facts. Let me clarify.

    Why did the author fail to mention China, the biggest coal consumer by far and the No. 1 coal importer? China net imported 130M tons of coal in 2010, 182M tons in 2011 and then 290M tons in 2012. In the first 4 months of 2011 China already imported 110M tons. The growth of China's coal imports is both huge and rapid.

    Likewise, India's coal imports also grew rapidly. The author distorted India's coal demand by quoting Coal India which stated that they cut coal imports from 35M tons to 5M-6M. Giving people the impression India's demand is weakening. Why would Coal India, a producer of coal, imports coal? Because they have an obligation to the government to supply a certain amount of coal and thus they have to import to make up the commitment when they can not produce enough. When they do produce more, there is less they need to import to meet the government obligation. For India as a whole, India imported 137M tons in 2012, and is projected to import 185M tons by 2017. The actual growth may exceed projection.

    The author's suggestion that US natural gas will replace coal was also misleading. At one point in 2012, ultra-cheap natural gas leads to almost same electricity generation between coal and natural gas. Today, the ratio is more like 1.65 times of electricity is generated from coal than from natural gas.

    The shale gas revolution is a giant Ponzi Scheme and a bubble to burst soon. Yesterday Ernst Young reports that the US shale industry spent $186B capital spending developing shale wells. How much shale gas was produced? Just 10 TCF, or at $3.0/mmBtu, worth $30B. That's less than a fraction of the capital spent drilling wells. Such a deep loss is un-sustainable. When they run out of fools willing to lose money in shale, the bubble will burst, and that will be great news to US coal.

    As for renewable, US installed solar panels generated just 0.1% of all US electricity last year. Renewable is far from reaching a scale that can make a difference. More over, it costs a lot of up front fossil energy to produce solar panels in the first place. As a coal investor I would welcome more rapid development of solar, as that means much higher electricity demand in making the solar panels, thus higher coal demand.

    The cyclic coal cycle is now starting to turn upward after a two year bear market. Don't be fooled by the politically motivated propaganda. Now is time to get into coal: ACI, ANR, JRCC, BTU.

  • Report this Comment On June 17, 2013, at 1:14 PM, prginww wrote:

    $2 NG will replace coal for power but who will produce NG for a $3 per MBTU loss? Haliburton CEO says that NG prices above $5 are profitable anything less is a loss. Power utilities will not buy NG above $4 per MBTU, the economics speak for themselves. BTW Euro gas today is $12 per MBTU.

  • Report this Comment On June 17, 2013, at 4:57 PM, prginww wrote:

    There are other sources struggling to be in the energy mix, specifically fuels that could replace gasoline. Methanol for example is cheaper and cleaner than gasoline being using in emerging economies like China. Supplies and potential supplies of natural gas are abundant, both in the U.S. and around the world. Updating outdated regulations would allow these fuels along with others to compete with gasoline at the pump.

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