Coal is an important part of global energy portfolios and holds an approximately 30% share in total global energy. In recent years, lower natural gas prices, strict environmental regulations and weak global economic growth have adversely affected coal demand and coal prices. The weak coal market conditions have weighed on the market values of U.S. coal companies. Going forward, despite the strict environmental regulations, I believe coal will continue to hold a dominant position in global energy portfolios and coal demand will continue to increase, mainly backed by a rise in coal consumption in Asia. I believe U.S. coal companies should target to increase their coal exports to tap the available growth potential of coal consumption in Asia; coal-fired electricity capacity in Asia is expected to double by 2035. If U.S. coal companies are able to increase their coal exports to Asia, this will help them offset weak coal demand in the U.S. and fuel future growth.
Opportunity for Higher U.S. Coal Exports
Despite the tough environmental regulations, the International Energy Agency projects that global coal demand will increase to 9 billion tons per annum by 2019, up 2.1% on average. The growth in the power sector will fuel growth in coal demand as coal-fired electricity generation capacity is expected to more than double in Asia from 2014 through 2035. Electricity generation capacity in Southeast Asia is expected to increase from approximately 700TWh in 2011 to 1,900TWh in 2035, mainly led by China and India. Due to its low cost and abundant supply, coal emerges as the fuel of choice for electricity producers. Coal is the cheapest source of electricity generation, as it costs $82 per MWh, as compared to the costs of natural gas and offshore wind being $84 per MWh and $189 per MWh, respectively.
In the next 15 years, China is expected to add 345-to-450GW of coal-fired power plants; currently China has approximately 820GW of coal-fired electricity capacity, and coal accounts for more than 65% of China's total energy portfolio. Also, China's thermal coal imports are expected to increase by approximately 580 million tons by 2035, from 220 million tons in 2014. Other than China, growth in India's coal consumption will also fuel coal demand growth. Currently, coal-fired electricity accounts for approximately 60% of India's total electricity generation. The government of India is backing policies that support coal-fired electricity generation. India's coal-fired electricity generation is expected to increase from 155GW in 2014 to approximately 400GW in 2035. Also, India's thermal coal imports are expected to increase by more than 200 million tons per annum by 2035, as compared to 133 million in 2013. Also, coal-fired electricity capacity is expected to increase in Philippines, Malaysia and Vietnam from 2014 to 2035.
As coal consumption is expected to increase consistently in Asia in the next 15-20 years, this creates a good opportunity for U.S. coal producers to target Asian markets for coal exports. I believe Peabody Energy (NYSE:BTU) is the best positioned U.S. coal company to benefit from higher Asian coal demand, as it has operations in Australia, which makes it more feasible and cost effective to cater to the growing coal Asian imports. Also, other U.S. coal companies like Alpha Natural Resources (ANR), Arch Coal (NYSE:ACI) and Walter Energy (NYSE:WLT) should increase their focus to export more coal to Asia to benefit from growing coal demand. If U.S. coal companies are successful in capitalizing on expected Asian coal imports, this will portend well for the U.S. Coal Industry's future growth. The map below shows U.S. coal exports by coal type and region, based on 2013 data.
The U.S. Coal Industry has been adversely affected by tough environmental regulations and lower natural gas prices, which has resulted in weak coal market fundamentals. As U.S. coal market fundamentals remain weak, I believe U.S. coal companies should target to increase exports to Asian markets, as coal demand in Asia, led by China and India, is expected to grow consistently from 2014 to 2035. The expected increase in Asian coal imports will help offset the weakness in U.S. coal demand, and has the potential to fuel future growth for U.S. coal companies.
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