The Case for Coal in 2009

If you take a bald eagle and a panda, take away their meals, and inject them full of steroids, what happens? Thankfully, we have regulations in place to ensure that we never find out.

As the U.S. develops a stimulus plan to outstrip China's in scale, it appears that just such an experiment is now under way. With traditional sources of nourishment for these economies torn away by the specter of global recession, the two nations will resort to stimulus steroids, with spending of perhaps $1.4 trillion or more combined. Nobody knows how the experiment will play out, but I have a notion it could be bullish for coal in 2009.

Together, China and the U.S. account for more than half of all global coal consumption, so when I think about $1.4 trillion worth of domestic spending in those countries with a focus on building infrastructure, it's hard not to imagine the engines of coal demand being stoked. Although some analysts are calling for weakening coal demand through 2009, I believe they may have it wrong.

Production cuts abound
It's been quite a December for coal already. Within the metallurgical coal sector, Cliffs Natural Resources (NYSE: CLF  ) cited market uncertainties as it included a West Virginia coal mine along with production cuts at its North American iron ore mines. Xstrata and Australia's MacArthur Coal have both slashed met coal production in Australia, amid an abrupt demand drop from Asian steelmakers. On the thermal coal side, Chinese coal companies are reportedly dropping 15% of production as price weakness continues.

The U.S. coal industry outlook is somewhat muddied by an array of conflicting indicators from the political, economic, and legal arenas. Arch Coal (NYSE: ACI  ) is looking ahead toward acquiring assets even while predicting a decline in U.S. production next year. The outgoing administration recently passed rules that make it easier for coal companies to dump waste from mountaintop mining activities, while Massey Energy (NYSE: MEE  ) faced legal battles this year regarding permits for such strip mines.

Under an Obama administration, I expect a more restrictive regulatory regime with respect to surface-mining activities in Appalachia, and so continue to favor CONSOL Energy (NYSE: CNX  ) among the purely domestic players. CONSOL obtains the lion's share of its coal from underground mines. While President-elect Obama's stated objective to curtail the production of electricity from coal could eventually dent domestic demand for thermal coal, I think it's safe to say the transition will not be a swift one under these economic circumstances.

Asia holds the key
Meanwhile, bullish signals are beginning to emerge from Asian industrial titans such as POSCO (NYSE: PKX  ) and China's Baosteel, suggesting expectations for renewed industrial demand in Asia. China recently announced plans to spend more than $21 billion on rail infrastructure within the coal-rich Shanxi Province, and leading coal producer Peabody Energy (NYSE: BTU  ) continues to pursue projects in China following the October announcement of a massive project in Inner Mongolia. Global steelmaker ArcelorMittal (NYSE: MT  ) signals that inventories are running low and that its recent production cuts may soon be reversed.

With China's stimulus-related activities already under way as we approach the new year, I expect coal demand to heat up there well before we see a boost in the United States. However, since China has aggressively grown coal-production capacity in recent years, it is difficult to gauge the extent to which China might be required to tap foreign sources of coal in the near future. Hopefully, a clearer picture will emerge as we move closer to the start of 2009 benchmark contract prices in April. Just as with the recently announced metals purchases, I expect China to support domestic miners before returning to the world market in earnest.

Let's assume for now that the World Bank is on the money with its forecast of 7.5% GDP growth for China in 2009. If such a level holds, then I believe China's position of relative strength will hasten its economic recovery on the back of the $586 billion stimulus plan. As for a potential $850 billion stimulus package in the U.S., I suspect the scale would be adequate to spur impressive commodity demand in the nearer term but utterly insufficient to spark true economic recovery in the face of such daunting challenges.  

Among the world's major coal producers, I see none better positioned than Peabody Energy to benefit from demand recovery in China, and then at least stabilized demand for U.S. coal. With massive projects in the works inside China, robust resources in nearby Australia, and some high-volume operations in the U.S. to boot, Peabody has the stuff to remain the king of coal through whatever the future may have in store.

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Fool contributor Christopher Barker wishes he could squeeze coal into diamonds. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Arch Coal, Cliffs Natural Resources, Massey Energy, and Peabody Energy. POSCO ADR is a Motley Fool Income Investor recommendation. The Motley Fool's disclosure policy likes to sing "A Coal Miner's Daughter" in the shower.


Read/Post Comments (12) | Recommend This Article (28)

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.

  • Report this Comment On December 22, 2008, at 10:53 AM, EggplantWizard wrote:

    The disclosure states "He owns shares of Arch Coal, Cliffs Natural Resources, Massey Energy, and Peabody Energy." [Reasonable choices, all] And yet you favor CONSUL energy among domestic players?

    Seems like a lack of commitment to your position.

  • Report this Comment On December 22, 2008, at 10:53 AM, BlueLakeVentures wrote:

    Coal is resposible for 40% of the CO2 released in the atmosphere, so let's hope decision makers are educated on more effective alternative energy sources. Perhaps the web site www.newgenerationgas.com can give them ideas.

  • Report this Comment On December 22, 2008, at 10:59 AM, XMFSinchiruna wrote:

    Eggplant ... not at all. :) I simply am restricted in my ability to trade positions on companies I cover. That's the sacrifice I willingly make to keep offering my analysis to Fooldom.

    Merry Christmas! [In the politically-correct, non-denominational sense of the word] :)

  • Report this Comment On December 22, 2008, at 6:23 PM, Brettze wrote:

    BlueLake

    YOu forgot to count firewood in millions of woodstoves and chiumneys round the world... There is no pollution controls whatsoever... Nobody is really counting how much pollution is released out of stovepipes and chimneys.. It sure adds up a lot! Dont laugh!! Environmentalists lack credibiilty as long as they are still choppin' wood!! Pffft!

  • Report this Comment On December 22, 2008, at 6:25 PM, Brettze wrote:

    My neighbor burns firewood everyday... TOO MUCH FOR ME TO BEAR!!!

  • Report this Comment On December 22, 2008, at 8:28 PM, neumo64 wrote:

    Brettze-

    There is a huge difference between burning fossil carbon and what I refer to as "current account" carbon, that which has only recently been fixed from the atmosphere, and which freely circulates through the biosphere. Up to 5% of the landscape once burned naturally every year, and that carbon had no impact on global CO2 levels; firewood burns much more cleanly than natural fires, and is only a fraction of the total emissions.

    It's the carbon that's been locked up for millions of years that we're releasing wholesale into the atmosphere that's the problem, raising global CO2 levels. Clean coal thus far is only a marketing slogan.

  • Report this Comment On December 23, 2008, at 6:34 AM, kayakmastr wrote:

    Coal is a fantastic resource. It is cheap and abundant. We need to figure out what to do with the CO2 other than release it into the atmosphere. Taxes and carbon credits do not solve the problem, they only make our energy sources more expensive, and consequently have a negative impact economically. Oh yes, and they do raise $$$ for the government and Al Gore's investment company. Global warming is a problem on a 25 - 50 year time scale, so we do have time for a thoughtful economically sound approach to solve it. Is coal a good investment now? Probably not until we see what the anti-coal politicos and lobbyists are going to do now that they are in power.

  • Report this Comment On December 23, 2008, at 2:17 PM, neumo64 wrote:

    kayakmastr-

    25-50 year time scale??? Look around you, global warming is NOW. We're out of time, we've squandered any "grace period" we might have had in the last two decades. I agree, coal is abundant, but unless we have WORKING carbon sequestration technology, it's planetary poison. As an investment, I wouldn't touch it with a ten foot pole.

  • Report this Comment On December 23, 2008, at 4:07 PM, OtherOracleOfOMA wrote:

    I agree with neumo64. Climate change legislation is a certainty, and I will go nowhere near coal producers until there's some evidence that CCS can be used economically on a large scale. Personally, I don't see any way how it possibly can - you've got to build new plants and a new pipeline grid, transport the supercritical CO2, verify that the sequestration site's geology is stable, and then pump it underground. Nuclear, wind, geothermal, nat gas, and solar are all almost certain to be cheaper than coal with CCS. Then there's also the risk of all that CO2 pumped underground being accidentally released and asphyxiating a bunch of small children or something, which is probably much more likely than a nuclear reactor meltdown.

  • Report this Comment On December 24, 2008, at 7:23 AM, kayakmastr wrote:

    neumo64-

    Global warming data show that there has been a 0.7 oC increase in the Earth's surface temperature over about 100 years. While the issue needs to be addressed beginning NOW, it does not have to be resolved NOW. It needs to be resolved over 25 - 50 years before it gets really serious.

  • Report this Comment On December 24, 2008, at 7:35 AM, kayakmastr wrote:

    PS In any case, we do not have the technology now to shift from fossil fuels to other energy sources without dire economic consequences.

  • Report this Comment On December 24, 2008, at 11:16 AM, 16180 wrote:

    There is no such thing as clean coal..............yet, however, Arch Coal has recently Pledged $5 Million to Washington University's Energy Consortium to Advance Clean Coal Technology. If progress toward this end can be marked, I believe this will reduce negative environmental pressure on coal companies (minus mining methods e.g. surface/mountaintop mining).

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