There's More Than 1 Way to Clean up Chinese Coal Plants

As China tries to deal with crippling pollution, it doesn't need to shut down or stop building coal plants to clean up its act.

May 13, 2014 at 3:03PM

Environmentalists would have you believe that the only way to make coal cleaner is to stop using it. That's just not the case, particularly in pollution-challenged China. For example, the country is again rumored to be discussing a ban on low-quality coal imports.

The U.S. Experience
Peabody Energy (NYSE:BTU) often discusses an incredible series of statistics. Between 1970 and 2011, the United States increased its use of coal by 170%. Based on that number, you might expect that pollution ramped up, as well. But it hasn't. In fact, regulated emissions from coal-fired power plants have fallen by nearly 90%.

That didn't happen in a straight line, of course, and things had to get bad before they got better. But that sounds strangely familiar -- almost like China today. In fact, China is only just beginning to industrialize, a process that the United States went through long ago. The U.S. industrial revolution is something we read about in textbooks today, but it didn't happen without its own troubles, like pollution, overcrowded cities, and poor working conditions.


(Source: unbekannt, via Wikimedia Commons)

Still a tough market
That said, the coal market is struggling today. For example, Peabody posted a first-quarter loss of almost $0.20 a share, nearly four times as large as the year-ago figure. Commenting on the coal export market, CEO Gregory Boyce said, "while current seaborne markets remain challenged, we look for fundamentals to improve as demand continues to increase and supply growth moderates. Peabody's position in the low-cost U.S. basins and high-growth Asian markets allows us to navigate current market pressures and benefit from long-term demand trends."

In other words, it sees a bright future, and Asia is going to play a big part in that. Arch Coal (NYSE:ACI), which, like Peabody, is big in the low-cost Powder River Basin, or PRB, region on the West Coast, is also positive about the long term. It points out that Asia is slated to bring on more than 150 gigawatts of coal-fired electric power over the next four years.

And Arch was very clear about the future in its annual report, stating: "We expect U.S. coal to play an increasingly important role in global coal supply in the years ahead ... Arch is focused on expanding our participation in global markets over time." The company's solid position on the West Coast -- the PRB accounts for about 45% of its business -- will help that along, since it's relatively close to Asia.

That said, like Peabody, Arch posted weak first quarter earnings. The roughly $0.60 loss per share was nearly twice the loss of the year-ago period. And Arch has been selling assets and raising cash to ensure it survives coal's malaise. It should, considering it has more than $1 billion in cash on the balance sheet. But it may not be pretty.

Cleaning up China
The cleanup taking place in China is actually good news. The nation is working on integrating newer coal technologies like installing scrubbers at existing plants and building coal gasification facilities that turn coal into cleaner-burning gas before it's used. China is also looking to step up the value chain in coal, as it again considers banning low-quality imports.


(Source: SeaWiFS Project, NASA/Goddard Space Flight Center, and ORBIMAGE, via Wikimedia Commons)

The country most affected by that will be Indonesia. But if China can't get its coal from Indonesia, it's going to have to turn to other sources. That's great news for Peabody, which has thermal coal operations in Australia and a 50/50 joint venture with a large Chinese coal importer. Arch mines for coal only in the United States, so it isn't as well-positioned. But that likely means a delayed impact -- not a missed opportunity.

China looking to clean up coal isn't a bad thing for coal miners with a global sales footprint like Peabody and Arch. The duo's recent results suggest that they are still dealing with a tough market. But, as the ancient proverb says, "This too shall pass." And China's environmental efforts will help that process along.

This U.S. trend is why domestic coal miners are looking to the export market
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Reuben Brewer 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.

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