How Coal Companies May Not Burn Out In A Low-Carbon Environment

Includes: ANRZQ, ARCH, BTU
by: Jay Wei


The absence of coal mining companies in the pursuit of advanced coal technologies is making them vulnerable to reduced profitability in the future.

Coal mining companies could increase their value proposition by looking into clean-coal technologies.

Investing in coal-related technologies, coal companies are poised to transform themselves beyond mining and provide value-added non-commodity coal.

Times have certainly changed for coal amid increasing concerns of its impact on both air quality and greenhouse emissions. But major coal companies from Peabody Energy (NYSE:BTU), Arch Coal (ACI) to Alpha Natural Resources (ANR) don't seem to have changed much, as mining remains their most focused business activity. Mining operations was all that coal producers had to carry out when they could sell coal fresh out of mines straight to coal users who would then burn it free of environment concerns.

But today's coal no longer has the desired quality in its primitive form. When faced with a product issue in any case, the producer would likely do something to make its product more suitable to the market. While companies from power generators to clean coal technology start-ups all try to make burning coal more efficient and less harmful, coal companies can't afford not to be actively involved in potential clean-coal advancements. It's their product after all.

It's a shock that coal miners have not really attempted to make coal a cleaner fuel to burn. Investors may have to demand more actions if they are all uncertain about the future of the coal business and their coal investments. Shares of Peabody, Arch, and Alpha have all been on a steady decline since early 2011. The fall is accompanied with increasingly heavier trading volume, indicating overwhelmingly bearish outlook on coal. When a new era is upon an industry, companies must adapt to the changes. Maybe it's time coal companies transform themselves to operate beyond mining and make advancing clean-coal technologies part of their normal business functions.

Failing to do so, coal mining companies may put their business at the mercy of power plants and other coal users whose ongoing clean-coal technology initiatives could lead them to dictating the future flow of coal supplies. If all that coal producers can do is to offer coal as a commodity without certain added value, they risk being priced out of their usual profitability. If technologies could provide a way of changing the composite of coal in its natural formation to make it burn more cleanly and efficiently, the coal in its altered form would be more valuable relative to the unprocessed commodity coal.

It's reasonable to expect coal mining companies to sell to power generators and other industrial users the coal that they have processed and thus, is cleaner to burn and emits less. To do that, significant investments in clean-coal technologies have to be made by coal mining companies. But in the end, the spending would both provide business benefit and help in regulatory compliance. Technological advancements are what coal companies should look to in their current, challenging business situations. With innovation, the use of coal, the cheapest and most reliable source of energy, may really become part of the future energy mix, rather than a thing of the past.

By changing its original chemical composition, coal could be converted to a cleaner-burning fuel through induced chemical reactions in a controlled transformation process. There are already known clean-coal technologies being pursued by both power generators and technology companies. Clean Coal Technologies Inc. has developed a patented process technology called pre-combustion beneficiation process that may reduce some 90% of the chemical pollutants from coal, making coal a more compelling energy source. Some power companies have demonstrated the feasibility of a different technology that would turn coal into gas. The gasification process helps remove impurities for the synthesized gas, resulting in fewer carbon emissions compared to burning coal directly.

Coal companies could either work out their own clean-coal technologies, or partner with third parties to solve issues specific to particular coal users. Instead of treating coal as a commodity, taking a product perspective may help coal companies find ways of making their coal product more valuable to customers, the coal users. For example, working with power generators, coal companies may figure out how to burn coal more efficiently by using different types of coal and varied combustion processes. When less coal is burned, fewer pollutants are emitted. But using less doesn't necessarily mean lower sales revenue if higher unit prices are justified for products of better qualities.

Relying on predicting a rebounding demand for coal from changing commodity cycles, uncertainties in renewable energy growth and even fluctuation in natural gas prices is only a matter of betting with short-term business tactics, rather than devising long-term corporate strategies. Remaking the coal industry, or losing it, is a question coal mining companies and their investors have to really dig into.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.