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The Future of Coal Relies Heavily on This Country

By Matthew DiLallo - Apr 12, 2013 at 3:00PM

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While India has massive coal reserves, it still relies on imports to meet its energy needs.

Just as one man's trash is another man's treasure, so too with energy resources. Here in the States, we seem to have a great disdain for coal. No matter how hard we try, we just can't seem to get its ebony facade to turn green. Because we have coal in abundance (we own 28% of the world's reserves), producers are looking outside our borders for new customers. While China makes a lot of headlines for its coal demand, India could become coal producers' next best friend. 

India is the fourth-largest, energy-consuming country in the world behind the U.S., China, and Russia. Last year, 55% of the country's energy generation capacity was from coal-fired power plants; however, 70% of the electricity actually generated came from coal. While India has 7% of the world's recoverable reserves, those reserves are a third of the size of those in the U.S. Further, the country is slowly adapting domestic production but it has poor infrastructure in place, which is holding back its production growth.

India's overall reliance on coal is only expected to increase in the future. In fact, it's expected to overtake the second spot in coal consumption from the U.S. by 2025 according to the IEA. Overall demand is expected to triple by 2035 after doubling in the last five years.

So, while it has the reserves, it won't be able to produce enough from those reserves to meet its demand. To bridge the gap, the country is increasingly reliant on imports. In 2010, only 3% of its 90 million tons of imported coal from the U.S. However, as its reliance on imports increases, so will its imports from the U.S. That plays right into the hands of U.S. coal producers who are focused now more than ever on exporting coal.

That's why India's demand for imported coal will be important for coal exporters like CONSOL Energy (CNX -0.66%) and Alpha Natural Resources (NYSE: ANR). CONSOL currently ships to four continents from its Baltimore-based coal export terminal. India is among the many international destinations for its coal. Alpha Natural Resources ships to five continents, and also counts India among the many destinations for its coal.  

Increased Indian coal imports would also benefit coal terminal owner Kinder Morgan Energy Partners (NYSE: KMP). The company is adding to its export capacity in its Louisiana International Marine Terminal as well as at two terminals in Houston. It's also considering a coal export terminal at an existing bulk facility in Charleston, S.C.

Kinder Morgan is filling a vital role for companies like Arch Coal (NYSE: ACI) and Peabody Energy (BTU). Both companies have signed long-term export deals with the company. These export deals represent the quickest and least-expensive options for coal producers as it saves them millions in up-front capital expenditures.

While U.S. coal producers will benefit from increased demand from India, the real winner in the international coal trade could be Peabody Energy. As I pointed out, just 3% of India's coal imports came from the U.S.; however, 28% of its imports came from Australia. In 2011, Peabody acquired Australian coal operations making it perfectly positioned to benefit from this coal trade. 

Sometimes as investors we get too caught up in the local headlines that say coal is dead. We live in a global economy now -- globally, coal is alive and well. As the international coal trade grows in the year ahead, coal exports could be a huge driver to increase the value of our nation's coal producers. 

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