Is Coal A Dead Commodity?

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Includes: KOL
by: Vulcan Investments

Summary

IEA predicts that global demand for coal will continue growing at an average rate of 2.1% per year breaking the 9 billion-tonne level by 2019.

Earlier this year, the US Environmental Protection Agency (EPA) proposed regulations, aimed directly at coal-fired power plants, requiring carbon emissions to be cut 30% by 2030.

While it’s an admirable goal to want to clean up the environment, the economic reality is that coal isn’t going away as a reliable energy source anytime soon.

Earlier this year, the US Environmental Protection Agency (EPA) proposed regulations, aimed directly at coal-fired power plants, requiring carbon emissions to be cut 30% by 2030. By the EPA's own estimates this will reduce coal-supplied power in the U.S. from 40% today to 30% by 2030. Naturally, the news of this proposal has put increased pressure on current coal prices. But is coal a dead commodity?

The price of coal began its collapse in 2011 due to vast new discoveries of natural gas in the U.S. With the price of natural gas so low and as an alternative energy source to coal, power companies naturally began the switch to the cheaper commodity to cut costs. Public opinion toward the "dirty fuel", along with the perception of decreased demand and active attacks from the government has had a devastating impact on coal prices and companies associated with the industry. The Dow Jones Coal Index fell an impressive 80% from early 2011 until now as seen in the following chart:

I say "perceived" decrease in demand because even though domestic consumption of coal has been down in 2014, U.S coal exports have increased more than 60% from 33.5 million tons in 2009 to 51.1 million tons in 2013. This large increase can be attributed to emerging market demand for cheap energy. The global increase in demand has more than offset the U.S. reduction in demand

The total share of global energy for coal is 30.1%, only slightly below crude oils share at 32.9%. Last year, coal's share of global energy hit its highest percentage since 1970, making it the fastest growing fossil fuel. World consumption grew 3% year-over-year driven by use in developing nations.

China is the world's biggest coal consumer. Today, coal makes up 67.5% of China's total energy demand, actually the lowest on record following the countries new measures aimed at combating pollution. Even so, China continues to build new coal fired power plants at a rate of one completion each week. The world's second biggest consumer of coal is the United States, and despite the recent decrease in coal consumption this year, coal still produced 39% of net U.S. power generation. India, the world's third largest coal consumer, expects consumption to double over the next 30 years. As you can see, despite coal being the single dirtiest fossil fuel source available, demand continues to increase because it is inexpensive, reliable, and plentiful. Ethics aside, coal is here to stay for the foreseeable future.

The International Energy Agency (IEA) recently released its annual 'Medium-term Coal Market Report' which notes that China's coal consumption will account for 3/5ths of demand growth during the outlook period to 2019.

"We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand" - IEA Executive Director Maria van der Hoeven.

IEA predicts that global demand for coal will continue growing at an average rate of 2.1% per year breaking the 9 billion-ton level by 2019.

While it's an admirable goal to want to clean up the environment, the economic reality is that coal isn't going away as a reliable energy source anytime soon. According to Bloomberg, a megawatt/hour (MWh) of coal energy currently costs around $82 while natural gas costs $84/MWh. Compare this to $189/MWh for offshore wind and $254/MWh for heliostat solar, you can see that coal is the cheaper alternative. Let's also remember that coal is used in steel making, demand for which is expected to increase 30% over the next 20 years.

Demand for coal remains intact and is actually continuing to increase at a moderate rate while some supply is starting to come off line. Coal miners are closing mines and postponing planned projects until prices for the commodity increase. A few coal producers, like Patriot Coal and America West, have gone bankrupt recently, further affecting supply. These developments along with the rise in natural gas prices, currently up over 100% from its lows, is beginning to and will inevitably continue to have an impact on coal prices. In short, Lower Supply + Ever Increasing Demand = Higher Prices. Higher Coal Prices = Higher Stock Prices for Coal Miners.

This article contains the opinions of the author but not necessarily the opinions of Vulcan Investments, LLC. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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