The War on Coal rages on as the Tennessee Valley Authority once again announces it has plans to reduce its coal use.

Eight closures
The TVA just announced that it was going to shut eight coal-fired plants down, a move that will result in power generation from coal falling by half of its current levels. Two of those plants are located at the Paradise Fossil Plant in western Kentucky, both of which will be shut down and converted into natural gas power plants.

The TVA has been aggressively reducing its coal usage over the past few years. In 2011, the TVA produced 52% of its power from coal; this has been reduced to 38% in fiscal 2013. Going forward, the TVA wants to reduce that even further to just 20%.

This doesn't bode well for companies like Arch Coal (NYSE: ACI), which has plenty of coal reserves located in the United States.

5 billion tons
Arch Coal has ~3.3 billion tons of coal in the Powder River Basin, ~1 billion tons in Appalachia, and ~1 billion tons in bituminous thermal located in Illinois and Colorado. All in all, Arch Coal has over 5 billion tons of coal in the United States. The company still needs a buyer for all of that coal, however.

With the United States slowly shifting toward natural gas, coal companies will have to deal with shuttered power plants and reduced demand for their output in the years to come. With less demand coming from domestic power companies in the foreseeable future, Arch Coal has rapidly reduced its capex while it waits for international growth to kick in.

Arch Coal spent $541 on capital expenditures in 2011, but for 2013 that will go down to $290-300 million. Part of this is due to Arch Coal shutting down several of its mines, with two in Kentucky being shut down.   

Going forward, even though Tennessee Valley Authority may have left coal in the dust, international growth may help turn around coal's problems.

Not over yet
By 2017, China and India will have built an additional 217 GW of coal-fired power capacity while the rest of Asia will build an additional 39 GW. Asia is the primary source of growth for thermal coal, with Latin America only adding 3 GW of capacity and Europe/Africa/Middle East adding 29 GW of capacity.

On top of that, U.S. export capacity is expected to grow from 113 million metric tons in 2012 to 227 million metric tons in the near future. The caveat to this is that U.S. coal exports hit a record in 2012, but oversupply in Asia is causing demand to drop in 2013.

Booming demand from Asia
Peabody Energy (BTU) sees China's demand for coal rising from 4,069 million metric tons in 2012 to 4,890 million metric tons in 2017. This is being attributed to a rise in industrial production which is spurring both increased steel production and higher power consumption.

For India, Peabody Energy is expecting a 194 million metric ton increase in demand over the same time period. Steel production is going to increase demand by ~150 million metric tons per year for metallurgic coal.

While Peabody Energy waits for international coal demand to increase, it is also reducing spending, similar to Arch Coal. Peabody's capex is down 62% year to date. On top of that, Peabody Energy has increased U.S. productivity by 8%, which in turn helped to reduce costs per ton by 2%. 

Peabody is expecting to produce 180 million-190 million metric tons of coal in 2013, but until international demand growth kicks in again it will keep divesting non-core assets. This way, Peabody can preserve its liquidity and have cash on hand when the macro picture starts turning around and coal prices start increasing.

Final thoughts
Both Arch Coal and Peabody Energy's future are dependent on growing international demand, as well as shrinking coal reserves pushing coal prices back up. I wouldn't recommend buying into coal due to environmental concerns, as these concerns will keep cutting into coal power generation as natural gas takes over. If you are extremely bullish on Asian demand pushing up prices and providing a huge source of growth, be prepared for a few rocky years ahead.