Coal's Long Sunset

Feb. 12, 2016 2:34 PM ETKOL, TONS5 Comments
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MassifCapital
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Summary

  • Coal may be down but it is not out, global coal use is still expected to increase through 2040.
  • In the US coal is still used produce between 35% and 40% of electricity.
  • Natural gas switching in the US is occurring, but when the price rises above $2.50 mmBtu it becomes more cost effective to burn coal.

Although many know that oil consumption in the OECD has been declining for over ten years, what has gone largely unnoticed is that so too has oil's share of global energy consumption (that is oil as a source of the energy consumed globally). Chart A, below, shows the percentage of global energy consumption by source in terms of millions of tons of oil equivalent, Chart B focuses on the percentage of global energy consumption of oil, natural gas and coal over the last two decades of available information. What is worth noting about the charts is that despite the fact that oil has fallen in importance over the last 20 years' no one claims that the death of oil is imminent, yet coal, a commodity of increasing importance over the past two decades is frequently proclaimed as dead or dying. Looking at the market for coal globally, one can only conclude that the thesis that coal is dying is either premature or incorrect. (Both charts are based on information from the BP Statistical Review).

Coal mining has been considered a dead industry for some time; some might even consider it to have been a dying industry since the 1950s. Nevertheless, it persists and has grown in importance globally over the last twenty years. It may be a sluggish, low-growth commodity, which lacks the sex appeal of tweets, snaps and selfies; it may struggle to maintain market share in the US and regions of Europe, but it is far from dead. Rather than dying, the coal industry, especially in the United States, is suffering a massive hangover. Like many commodities, the emerging market (principally China) call on coal between the late 2000s and 2013, which resulted in production growth globally of close to 70%, has created chaos throughout the coal supply chain.

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Massif Capital is a value-oriented investment partnership focused on global opportunities in energy, basic materials and industrials. We invest principally in businesses with long lived assets that generate predictable cash flows that require not only capital allocation acumen from management but a keen focus on operational excellence. Our investment practice is primarily concerned with the nature of risk and value as it relates to protecting, enhancing and deploying the irreplaceable capital of our investors into a concentrated portfolio of economically productive assets.

Disclosure: I am/we are long CNXC. 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.

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