Did China Just Kill the Coal Industry?

Major cities are under the gun to ban coal use completely in the next few years, but it may not be as bad as all that

Aug 12, 2014 at 9:33AM

Already under the gun here in the U.S., last week the coal industry received potentially devastating news that China was banning the use of coal in Beijing and other major cities by 2020 in an effort to clear the air in smog-clogged metropolises. 

Peabody

Digging a hole to China. Peabody's steam coal Twentymile Mine in Colorado. Source: Peabody Energy

According to the Chinese government's media outlet Xinhua News Agency, cars, coal, industrial production, and dust account for 31%, 22%, 18%, and 14%, respectively, of the particulate matter smaller than 2.5 microns in diameter floating in Beijing's air and are blamed for the city's smog problems. Coal was responsible for more than a quarter of the capital's energy consumption in 2012 and was already on track to be reduced to less than 10% by 2017, with authorities banning new coal-fired power plants last September from being built around Beijing and two other major cities.

Other high-pollution fuels, like fuel oil, petroleum coke, combustible waste, and some biomass fuels will be also banned.

Coal has been a key source of generating electricity in China, which Bloomberg News says imported a record 330 million metric tons of coal in 2013, but is seeking to limit energy from coal to just 65% of the total this year. Expectations are for imports to be similar to last year, which could prove to be a problem for U.S. coal producers who have been counting on China to absorb their output following similarly restrictive regulations that have been adopted here.

Coal

We've come a long way since "Mike Mulligan and His Steam Shovel" yet it still looks very similar. Source: Wikimedia Commons.

Fortunately, domestic consumption is expected to run higher this year as natural gas prices rise. The Energy Information Administration anticipates U.S. coal production will grow 2.7% to 1,011 million short tons in 2014, with over 90% of it due to electric power generation, though it forecasts a drop of nearly 1% in 2015. There's little solace in that for U.S. coal miners like Alpha Natural Resources (NYSE:ANR) as it continues to idle capacity and lay off workers as a result. 

Others, like Peabody Energy (NYSE:BTU), remain caught in the pincers because its feet straddle the Pacific Ocean. Despite putting as positive a spin as it can on the situation, the coal miner saw profits of $0.33 per share last year turned into losses of $0.28 per share this quarter. It acknowledges the seaborne trade remains pressured from a supply glut -- everybody's been plying those waters to compensate -- but it maintains that coal remains as strong now as its been in recent memory as it accounts for its "largest share of global energy use in more than 40 years."

Imports into China remained strong, despite whatever else is going on there, and though India was a little weak it shouldn't be more than a short-term situation. The government in New Delhi has scaled back production targets for 2016-2017 to 795 million tons due to infrastructure problems, meaning India will continue to heavily rely upon imported coal. Australia has also just repealed its carbon tax that should lower energy rates.

All the foregoing may explain why many analysts aren't concerned all that much about the new declarations the Chinese government made last week. When taking a broader view of of the country's continued economic expansion and the growth of Tier II and Tier III cities, there may not be much change in China's actual consumption at all, just where it's consumed. Nielsen data expects these cities, what it calls "emerging Tier I cities," to become the next drivers of China's growth.

The coal industry is no doubt under pressure, but China's announcement wasn't the death blow many may have assumed it was.

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Rich Duprey 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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