Can the Coal Industry Survive the Shakeout?

Coal companies have gone through some tough times, but these companies are likely to do well in the shakeout.

Jan 29, 2014 at 10:21AM

The coal sector has been through a lot in the past three years. The spot price of thermal coal has fallen significantly as advances in horizontal drilling and hydraulic fracturing have unlocked cheap natural gas in North Dakota and Texas. 

Metallurgical coal prices have fallen significantly as China's economy, which consumes around half of the world's coal , contends with a deflating credit bubble. 

With the recent spill of a chemical used to clean coal in West Virginia, the coal industry now has to deal with unwelcome headlines and worries of increased regulation.

Can the coal industry survive the cyclical downturn?

Long-term headwinds
There is no question that the coal industry faces some long-term headwinds. 

According to the National Association of Regulatory Utility Commissioners, about three-quarters of all U.S. coal plants are at least 30 years old. Since the average life of a coal plant is only 40 years, many coal plants will be nearing their retirement age in the next decade.

Because of new EPA regulations, it is highly unlikely that new coal plants will be built in the U.S. The EPA has a rule that requires all future coal plants to emit no greater than 1,100 pounds of carbon dioxide per megawatt-hour. The average U.S. coal plant currently emits around 1,700 pounds of carbon dioxide per megawatt hour. Unless new economical carbon sequestration technology comes in, we won't be seeing many new coal plants in the U.S.

In addition to coal losing market share, the overall demand of electricity growth is likely to slow as electrical appliances become more efficient. 

Long term positives
There are still positives. Despite the dour outlook, the Energy Information Agency expects coal to make up around 34% of total U.S power generation by 2035 from the current 37% today. 

Globally, the demand for coal is still going to be there. Poor developing nations will still use thermal coal for energy generation because coal is often the cheapest choice. Most nations don't have the luxury of cheap natural gas.

While Chinese coal imports have fallen significantly, India is picking up the slack. India's coal imports rose 21% in 2013 to 152 million tonnes and could rise another 12% in 2014.

In a lot of ways, India is where China was a decade ago. The country is entering a stage where it needs a lot of energy and infrastructure to grow its economy. Many experts predict that India will be the top importer of thermal coal in 2014 and will drive coal import demand in the decade to come.

The bottom line
Coal is currently in a low-growth mode. In a low-growth, challenging environment, the best companies are the lowest-cost producers and large diversified mining companies. 

Cloud Peak Energy (NYSE:CLD) is one of the low-cost producers. The company is the only pure-play coal producer in the the Powder River Basin. 

According to the Energy Information Agency, the Powder River Basin is the lowest cost producer of thermal coal in the U.S., with a spot price of around $0.50/MMBTU versus a spot price of $2.50/MMBTU for Appalachian coal.  

Because of its low production cost, Cloud Peak Energy is one of the few profitable coal producers. With a total debt-to-equity ratio of only 0.74, the company is also not as levered as the other thermal coal producers.

While levered metallurgical coal companies such as Walter Energy (NASDAQOTH:WLTGQ) and Alpha Natural Resources (NYSE:ANR) have seen their stock prices slump due to concerns over China, large diversified coal miners such as Rio Tinto (NYSE:RIO) have the financial strength and diverse income streams to last through the cyclical bottom.

The demand for metallurgical coal will eventually pick up. As of 2013, China is only 54% urbanized.  Most developed nations have urbanization rates of over 80%. As technology improves, cleaner thermal coal technologies could become economical as well.

But until that time comes, the best bets in the coal space are the low-cost producers and diversified mining companies. 

This company is anything but low-growth
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

 

Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers