Coal will die a slow death in America.
For the past couple of years, this has been the underlying thesis against investing in coal in America. The boom in cheap natural gas and the increasing scrutiny on greenhouse gas emissions in the U.S. have resulted in a slow fade of coal-fired power generation. What is even more astounding, though, is that U.S. gas production is fundamentally changing the competitive landscape in many countries, and that change could actually result in a revival for coal.
How, you say? Let's take a look.
America the bountiful
By now, you've probably heard that because natural gas is so cheap, it's taking market share away from coal in the electricity markets. According to Alpha Natural Resources (NYSE: ANR ) CEO Kevin Crutchfield, much of the comapny's thermal coal from the Central Appalachain region is out of the market when natural gas is under $4.
That isn't the only thing it's doing, though. With so many companies rushing to build natural gas generators, the electricity market is flooded to the point that the average cost of electricity hasn't budged in five years. While this may not be very attractive for utilities, it does make it less expensive for other industries in the United States.
More concerning for doemstic coal is that this is happening in its other markets such as energy-intensive manufacturing. Rather than relying on metallurgical coal for pig iron production, steel manufacturers companies are turning to direct reduced iron facilities that use natural gas-fired electric arc furnaces. U.S. steelmaker Nucor's (NYSE: NUE ) new $3.4 billion direct reduced iron plant is only possible today because of the boom in cheap natural gas here in the United States. Cement, chemicals, steel -- all of these industries are switching to natural gas because of the energy savings.
With backs to the wall, others turn to coal
So how does the success of natural gas in the U.S. signal a surge in coal demand? Well, probably the best way to explain it is with a quote from Paolo Sarconi, CEO of Italian oil company Eni:
I hardly can imagine anybody making an energy-intensive investment in Europe.
This holds true in other parts of the world as well. Without their own natural resources, energy prices in many countries are climbing, and it is hurting their competitiveness on the global markets. They can't turn to natural gas, though, because the costs for LNG transportation are extremely high, which keeps gas prices higher in these energy-hungry regions. To add insult to injury, the Fukushima Daiichi disaster has made many of countries reconsider nuclear power, making the price for energy even greater.
Add all of these factors up -- stiff competition in the U.S. has led to depressed prices, the costs to transport coal are much less than LNG, and energy hungry-parts of Europe and Japan need some sort of cheap energy source to remain competitive with the rest of the world -- and you have a market that's ready for coal.
So far this year, we've seen many countries increase their coal usage for these very reasons. Since Germany started weaning itself off nuclear power, coal use has increased nearly 5% while every other source of electricity has either remained flat or declined over that time period. Japan's coal consumption has increased by 24% over the past year to 5.4 million tons per month, and it is expected to increase as oil-generated electricity continues to drop.
Proof is in the production
There are clear concerns among many nations about the increased carbon emissions associated with coal, but for right now these regions are shifting to coal for purely economic reasons. Today a German utility saves about $32 per MWh using coal versus natural gas, and the price for European carbon credits are so cheap right now that prices would need to increase tenfold before coal loses its price advantage to other power sources.
This is leading many U.S. coal manufacturers to shift long-term strategies toward more exports. Cloud Peak Energy (NYSE: CLD ) has increased its Asian exports by 20% so far this year and is looking to expand export capacity to 30% of total production. Alpha already has the ability to export more than 25% of its entire production capacity, and it is looking to increase its terminal capacity to increase that export capacity even further. Peabody Energy (NYSE: BTU ) the largest of the American coal companies, has been exploring some plans to export from the U.S., but its focus on the export market has been more related to its operations in Australia. Between 2010 and 2013, Peabody has increased its Australian exports by sixfold.
What a Fool believes
It's not an easy market for domestic coal, but the increasing desire for foreign countries to remain competitive with America will require a cheap energy source, and coal has much more potential to be that source for the foreseeable future as natural gas keeps the prices down here in America. There are several variables that could alter this outlook, such as increased greenhouse gas regulations in developing nations as well as shale gas development in parts of Europe, but based on the current track coal could be ready for a surge thanks to the very fuel that has punished it.
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