The Church of England is divorcing itself from that dirty fossil fuel coal. It's selling securities that it owns in the industry and putting them on the verboten list. That's following along with a broader movement that's largely based in the more developed nations of the world. The only thing is that emerging economies can't get by without coal, which has big implications and is a potential opportunity for investors in the energy space.
Fire, brimstone, and coal
There's no question that without some technological advance, coal is among the dirtiest options for generating electricity. It's why so many others are being explored in places like the United States and England. Solar, wind, biomass (which generally means wood pellets), and even "less dirty" natural gas are all preferable choices today.
The most hated fuel in the world? Source: Public domain, via Wikimedia Commons.
The movement has taken on a larger life, too, with large investors, like colleges and now religious organizations, saying they won't support companies that engage in creating and/or using the dirty fuel. In developed nations, trying to push cleaner alternatives in this way makes complete sense. After all, there's already a reliable power grid, and new, cleaner fuel options are simply displacing older, dirtier ones. And there's little harm in an organization getting some green cred for announcing that it's jettisoning coal from its portfolio. Or is there?
The "other" half
The view from a developed market, however, is much different than the view in an emerging one. For example, according to the International Energy Agency (IEA), there are 1.3 billion people living without electricity in the world. However, a recent report from the Manhattan Institute explains that even that doesn't describe the whole problem, since the IEA's thresholds for electricity access are 250 kilowatt hours per year in rural areas and 500 kilowatt hours a year in urban areas. Residents of Paris, France, average around 7,100 kilowatt hours a year. That's a big difference.
This is why demand for coal, which is among the cheapest and most reliable fuel options in the world, is still going strong in developing nations (and some developed ones, too). In fact, according to the IEA, global coal demand is expected to increase 15% by 2040 despite all the headlines about renewable power. Recent demand growth has been driven by huge increases in developing markets, most specifically China, but also countries like India and Vietnam as these emerging nations seek to provide power to the masses.
While the growth rate may slow in some countries, the larger trend toward increased coal use appears to remain intact. Case in point, while China is looking to pull back on coal use, a Bloomberg analysis suggests that India is ready to take on the role of the world's largest coal importer.
Watch Asian coal demand. Source: historicair, via Wikimedia Commons.
So what?
The reason this is so interesting is because it suggests there will be a split in the market. For example, Peabody Energy (NYSE: BTU) has large operations in the United States and in Australia. Its Aussie business, which made up about a third of the top line in the first quarter, largely serves still-developing Asia, where demand is growing. The U.S. business, on the other hand, is facing a secular headwind as the power market shifts toward cleaner alternatives. Look for Peabody's U.S. operations to continue to struggle, with the Australian division offering better growth prospects.
Indeed, Peabody is likely in a better position than miners that operate out of the United States and rely on the country for the bulk of their sales. One such example is Cloud Peak Energy (CLD), where only about 7% of the coal the miner sold in the first quarter went to Asia. Essentially, miners with exposure to emerging markets are likely to be in a better position over the long term.
That will soon include the South32 spin-off from BHP Billiton Limited (ADR), which is slated to get BHP's thermal coal operations in South Africa, placing it in another energy-starved region. But what about a company like Yanzhou Coal Mining Co Ltd (ADR) (YZC 0.44%), one of the largest coal miners in China? Its coal sales volume increased nearly 19% last year, though it is expecting sales to be roughly flat this year. It isn't just exposed to a key coal market; it's actually in it.
The lingering problem
That said, there's a lingering problem even for miners located close to, or in, global coal hot spots: pricing. For example, despite shipping more coal, Yanzhou's gross profit in its coal operation was down nearly 7% year over year in 2014. Coal supply is outstripping demand right now across the globe, pushing prices lower. So, even where there's growth in demand, prices are still weak, and miners are suffering.
That should just add to the luster of an out-of-favor industry if you are into contrarian investing. Low prices will push marginal players out of the market and eventually lead to higher profits for the survivors. In fact, if you like going against the crowd, the Church of England's decision to label coal a "sin fuel," which garnered a great deal of media fanfare, is anecdotal evidence that pessimism about this still-dominant fuel is running high.
If you're an aggressive investor and willing to focus on miners with exposure to emerging markets, it might just be the time to jump aboard despite the fire and brimstone. Yanzhou is an obvious candidate for further research, as is Peabody, though the miner's U.S. operations suggest extra caution is needed. That said, to keep risk to a minimum, you might want to stick with companies that do more than just coal, like BHP and soon to be a stand alone company South32, where coal is just one portion of the overall business.
