This Could Be the Best Thing to Happen to Coal Companies in Years

Rumors that China will start to impose import bans on certain coal types could bring relief to the much beleaguered coal industry.

May 6, 2014 at 1:30PM

Basically any recent news related to American coal has been roughly equivalent to getting round-house kicked in the face by Chuck Norris. The slow decline in metallurgical coal prices, the increasing scrutiny on coal-fired power plant emissions, and clean coal looking more costly than burning $100 bills for power has made major coal producers Peabody Energy (NYSE:BTU), Arch Coal (NYSE:ACI), and Alpha Natural Resources (NYSE:ANR) assume a financial fetal position and keep spending to an absolute bare minimum to weather the storm. 

Coal Operations

Source: Peabody Energy Investor Relations.

There is a recent development that could have a profound impact on the coal market, but this time, it's actually good for a change. Let's take a look at what it is and how it could potentially impact these new players. 

The changing coal climate in China
China isn't completely oblivious of the impact its coal reliance has on the country, but it is awfully difficult for the country to completely pivot away from coal without taking some huge economic hits. One way to help change that, though, is to change the type of coal it uses. Coal is classified based on both its moisture content and its calorific value -- basically how much energy you can get from a fixed weight, measured in Calories per kg. Coals with lower calorific values are considered low-quality coals and generally produce high levels of ash as well as other pollutants, such as sulfur.

According to a recent article from Platts, the Chinese parliament is working on rules that wold ban the import of low-quality coal that has a calorific value of less than 3,900 Calories per kg and a sulfur content greater than 2%. This would mean the country would need to find a new source of coal to replace the 57 million tons of coal it consumed in 2013 that did not meet these standards. Just about all of the coal that did not meet this threshold was imported from Indonesia, and it represents about 34% of all coal imported to China.

China is trying to wean its way off of coal through increased production of domestic natural gas as well as major investments in nuclear power facilities, but it would be next to impossible to replace 60 million tons of coal consumption in a matter of months. So, it is highly likely China will need to rely more heavily on other sources of coal.

Chinese consumption could cover America's weakening coal market
Domestic coal has been on a steady decline for quite some time. Between 2007 and 2013, total U.S. coal consumption has declined by nearly 18%. With the rise of cheap domestic natural gas and the increased efficiency of alternative energy, it will be extremely challenging for coal to gain any of this ground back. It also doesn't help that between 2012 and 2013, total coal exports declined by 6.4%. Both of these two issues have led to near unprofitable level prices for coal. During this past quarter, all three of the companies mentioned above saw coal prices just barely outpace cash costs, and both Arch and Peabody had negative operating margins on coal from their most prolific mines in the Powder River Basin.

If China were to move away from low-quality coals, U.S.-based coals could stand to benefit immensely. U.S. coal meets the requirements for improved coal quality, and with over 200 million tons of coal capacity not used in the United States, it is capable of handling a major uptick in demand.

Of all the coal producing regions, companies with large operations in the Powder River Basin would likely be the candidates to benefit the most from increased Chinese coal demand. Not only does it have a low sulfur content that would be attractive to Chinese customers, but it is also closest to West Coast ports and would likely be the cheapest to export. This would obviously play well to Peabody, Arch, and Cloud Peak Resources (NYSE:CLD) since they are the three largest producers of coal in this part of the country. The one hitch to this plan is that there has been strong resistance to constructing coal export facilities on the West Coast, which would be required to move Powder River Basin coal -- or any other coal for that matter -- to China. 

Indirectly, though, increased demand could help boost prices for thermal coal in the U.S., which would be a positive for just about every company in the U.S. coal business. 

What a Fool believes
Unfortunately, these coal companies can't bank on this development yet because this Chinese regulation has not been put in place, and even if it does, it will take some time for the physical infrastructure to export the additional coal to actually get built. Also, U.S. coal producers will be compete with other coal producing nations such as Australia to fill that Indonesian-sized hole in China's coal demand.

Still, any good news for coal companies will be well received by these companies. With most companies tied to fixed pricing contracts for almost all of their production for 2014 and a large part of 2015, it will likely still be some time before Peabody, Arch, or Alpha dig their way out of their financial woes, but if coal can start making its way onto Chinese-bound ships, it could be the shot in the arm the industry needs. 

America's $600 billion energy problem means invest in these three stocks today
A dark specter is looming that is ready to stop America's Energy boom right in its tracks, and no one is talking about it. This one critical element could cost us over $600 billion, but every day we wait that number grows and grows. The U.S. government thinks investment in this sector is so important, even the Internal Revenue Service will give you a free pass if you invest in this select group of stocks. Our analysts at The Motley Fool have combed over this special class of stocks and we have identified three that could make you rich! Find out the names of these IRS-gift-wrapped stocks in our special report "3 Stocks The IRS Is Begging You to Buy." Simply click here and we'll give you free access to this valuable investing resource. 

Tyler Crowe has no position in any stocks mentioned.  You can follow him at under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

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

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, 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

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