Is There a Future for Coal?

Over the past two years, coal miners have had a tough time. Fracking and horizontal drilling have unlocked natural gas in the Permian, Bakken, and Eagle Ford in such a way that natural gas prices have stayed below $4 per mmBTU for the past two years. It could stay that way for a while yet.

Most power plants that can convert to using natural gas from coal have already converted. While there is still demand for coal due to long-term contracts, logistics, and plant issues,  it is likely that coal will continue to see less demand going forward.

The major coal companies are all seeing lower stock prices. Year to date, Walter Industries (NYSE: WLT  ) is down around 50%, Arch Coal (NYSE: ACI  ) is down 42%, while Peabody Energy (NYSE: BTU  ) is down 30%.

The EPA
Between oil, gas, and coal, EPA carbon emission requirements are likely to affect coal the most. This is because coal produces almost twice as much carbon dioxide as natural gas and 30% more than gasoline. 

In 2012, according to the US Energy Information Administration, coal fired power plants provided 18% of all energy nationwide but accounted for 31% of the energy related carbon dioxide emissions. 

For new coal plants, the EPA has proposed emission caps at around 1,100 pounds of carbon dioxide for every megawatt hour of power produced. A typical new coal plant emits around 1,800 pounds.  

The only U.S. coal power plant likely to meet the new EPA requirements in the United States is Southern Co's Kemper County power plant. The $5 billion project is currently 65% over budget and not yet complete. In April the Department of Energy estimated that a utility building a plant with new clean coal technology would pay twice the price of a conventional plant. 

Because of those prohibitive costs, most coal companies do not expect any future coal power plants to be built in the U.S.

Chinese technology
If United States fails developing an economical clean fired coal plant, not all is lost. China is very likely to develop clean coal technology as well. 

This is because the Chinese have huge incentive to do so. Sixteen of the world's 20 most polluted cities are Chinese. 

The majority of Chinese pollution can be attributed to China's use of coal. According to IEA, China consumes around 47% of total coal consumption in the world .

Unlike the United States, Chinese utilities do not have the luxury of substituting coal with cheap natural gas. While natural gas is below $4 per mmBTU in the United States, the LNG spot price is over $18 per mmBTU in China. 

China's pollution problem will only get worse as more Chinese drive cars and use more energy. As Chinese citizens become wealthier, they will also demand cleaner air and less pollution.

China is actively investing in clean coal technology because they have no choice. If the Chinese develop an economical clean coal system, coal miners around the world will benefit and thermal coal will have a stable future.

The bottom line
There will always be demand for metallurgical coal, which along with limestone and iron ore, is needed to make steel. As for thermal coal, until technology is made to burn coal cleanly and economically, thermal coal companies will have a hard time. A cold winter can hold up the price for thermal coal in the short term, but the long-term looks bleak. 

The Motley Fool's Top Stock for 2014
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

 


Read/Post Comments (0) | 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.

Be the first one to comment on this article.

DocumentId: 2756798, ~/Articles/ArticleHandler.aspx, 7/24/2014 11:43:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement