The Key for Coal Bulls: Patience

by Aaron Levitt | December 21, 2012 9:28 am

Coal investors had little to cheer about in 2012. As the hydraulic fracturing revolution[1] swept across North America, record amounts of natural gas drove prices for the fuel to record lows. Compounding that were new Environmental Protection Agency rules designed to limit carbon-dioxide emissions from new power plants, effectively halting construction of new coal-burning plants and making natural gas even more attractive.

All that’s causing a monumental shift in how utilities generate electricity and has sent many coal operators tumbling to low earnings, mine closures and even bankruptcy.[2]

Be patient, however: 2017 could finally be coal’s year, if the International Energy Agency is right.

Overtaking Oil?

Investors in the beleaguered coal sector finally received some good news by way of a new International Energy Agency (IEA) study. According to IEA — a leading authority on energy economics — despite the growing use of natural gas and alternative energy, coal will eventually overtake oil[3] as the world’s main energy source in the next five years.

The Paris-based group predicts the amount of coal[4] burned globally every year will increase by an additional 1.2 billion metric tons. That’s an amount roughly equivalent to the current annual coal consumption of the U.S. and Russia combined. Overall, the IEA predicts global use will hit 4.32 billion tons of oil equivalents (Btoe) by 2017 — surpassing worldwide oil demand.

That’s certainly a different tune than what we’ve been hearing here in the U.S. over the last year.

But the U.S. is the main reason for coal’s ultimate rise to stardom.

As fracking and the EPA’s new rules have made natural gas the fuel du jour[5] in the States, prices for thermal coal have plunged, especially out of the Appalachian basin. That’s actually made the fuel more attractive globally. As domestic coal demand continues to decline, more U.S. coal is going abroad — even to alternative-energy-friendly Europe.

Across the Continent, where natural gas and liquid natural gas prices are far higher than in the U.S., the competitiveness of coal for power generation is strong. Likewise, as Germany begins phasing out its nuclear reactors as a response to Japan’s Fukushima disaster, it’s ironically turned to “dirty” coal to meet its growing power needs.

Increased usage in developed Europe[6] is one thing. However, the IEA sees the most growth coming from the emerging world — specifically China and India.

According to the IEA, demand from those two countries will power worldwide coal use over the next five years. After all, cheap coal-fired electricity is a main reason the two BRICs have seen breakneck economic growth. India is currently on course to pass the U.S. as the world’s second-largest coal consumer, while China will remain the largest coal[7] importer. Imports into China surged 39.5% this year alone.

While much has been made of China’s potential slowing, the IEA predicts that even in a scenario in which its economic growth were halved, China’s voracious demand[8] for coal would still go up. Its coal consumption will account for more than half of all coal demand as early as 2014.

Put a Lump of Coal in Your Stocking

While the U.S. coal sector shakeout[9] is still hitting smaller firms like James River Coal (NASDAQ:JRCC[10]), the bullish IEA forecast could finally be the catalyst to change the two years or so of bad news for the industry. Indeed, it may finally be time to add some of the thermal coal names to a long-term portfolio.

The success of the U.S. coal sector rides on their ability to get the fuel to export terminals. The place with the prime geography is Wyoming’s Powder River Basin because it’s close to the West Coast. Several ports in the U.S. and Canada are in the planning stages, and if they’re built, Powder River operators Peabody [11](NYSE:BTU[12]), Alpha Natural Resources (NYSE:ANR[13]) and Arch Coal (NYSE:ACI[14]) should have advantageous access to emerging Asia.

However, these ports are several years away from being operational, and there’s no current coal terminal on the U.S. West Coast.

Still, investors shouldn’t fret. Kinder Morgan Energy Partners (NYSE:KMP[15]) has you covered at its Texas terminal. The energy logistics firm recently signed new contracts with Peabody[16] and Arch to increase the amount of coal they can export from its terminal. Peabody will gain the ability to ship an extra 5 million to 7 million tons per year from 2014 to 2020. Likewise, Arch will be able to ship at least 10 million tons of coal per year from of the Texas terminal.

That access to emerging Asia is key for investors and could make the duo the best way to play rising global demand and IEA’s forecast.

As of this writing, Aaron Levitt didn’t own any securities mentioned here.

Endnotes:
  1. hydraulic fracturing revolution: http://investorplace.com/hot-topics/energy-independence/
  2. bankruptcy.: http://www.investorplace.com/2012/08/an-ever-darker-outlook-for-coal/
  3. coal will eventually overtake oil: http://www.iea.org/newsroomandevents/pressreleases/2012/december/name,34441,en.html
  4. coal: http://investorplace.com/hot-topics/coal/
  5. natural gas the fuel du jour: http://investorplace.com/2012/12/doe-report-should-push-natural-gas-forward/
  6. developed Europe: http://investorplace.com/2012/12/how-to-play-newly-fracking-friendly-britain/
  7. coal: http://investorplace.com/2012/09/coals-savior-underground-gasification/
  8. voracious demand: http://investorplace.com/2012/11/china-strength-buoying-the-coal-sector/
  9. coal sector shakeout: http://investorplace.com/2012/09/worldwide-coal-slide-still-setting-up-a-buy/
  10. JRCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=JRCC
  11. Peabody : http://investorplace.com/real-america-index/wyoming-peabody-energy-btu-mining-coal-under-big-skies/
  12. BTU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BTU
  13. ANR: http://studio-5.financialcontent.com/investplace/quote?Symbol=ANR
  14. ACI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACI
  15. KMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMP
  16. recently signed new contracts with Peabody: http://www.reuters.com/article/2012/07/17/peabodyenergy-brief-idUSL4E8IH2RT20120717

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