 Coal has taken a beating the last three years, but 2014 should be the year that coal makes a big comeback. Here's why: With the global economy improving, the world's energy consumption will continue to grow. And while natural gas - coal's chief competitor - is cheap in the United States, it's much more expensive overseas. Four to five times more expensive. That makes coal a strong energy choice for developing nations... and it's growing stronger.
Here in the United States, the Energy Information Administration (EIA) expects coal will remain America's biggest source of electricity generation for decades to come. To be sure, there are regulatory changes underway here in the United States that will pressure the coal industry. In September, the U.S. Environmental Protection Agency (EPA) published rules limiting emissions from new coal plants to a maximum of 1,100 pounds of carbon dioxide a year. Currently, coal plants release an average of 1,800 pounds a year.
But since old plants aren't affected, that just means new plants have to be built more efficiently. Also, the EPA issued new power plant emission regulations for mercury and other toxins. The so-called Mercury and Air Toxics Standards (MATS) mandates should prevent about 90% of the mercury emitted by power plants from being released into the air.
The MATS become effective in April 2015. Companies are already advancing technological solutions to this problem. Despite these rigorous new environmental restrictions, the EIA expects coal consumption in the United States to continue growing steadily year-by-year.
But we can't tell the story of coal without talking about China. For example: - In the last decade, China has built an average of two coal-fired power plants every week. It uses coal to provide about 70% of its energy.
- China consumes nearly as much coal as the rest of the world combined. Its coal use jumped more than 50% between 2006 and 2012, to 3.8 billion tons.
- As a result, China went from a net coal exporter in 2009 to the world's top coal importer just two years later.
- Going forward, half of all of China's power-generating capacity built between 2012 and 2020 will be coal-fired.
We keep hearing that China is big on alternative energy. After all, the Chinese don't like having polluted air any more than anyone else. And it's true that China has a plan to use more solar, hydro, natural gas and nuclear power. But even though coal-fired energy is likely to become a smaller piece of the pie... the pie continues to grow much bigger every year. China's overall energy use will continue to grow... a lot. So, China's coal consumption in absolute terms will expand rapidly for several more years. As a result, China's appetite for thermal coal, used to generate electrical power, probably won't peak until 2030.
And China is not the only country using more coal. Energy analysts at Wood Mackenzie expect coal to surpass oil as the key fuel for the global economy by 2020. Global coal consumption should rise by 25% by the end of the decade, to 4.5 billion tonnes of oil equivalent. (The world will only be using the equivalent of 4.4 billion tonnes of oil by that time, according to Wood Mackenzie.) Meanwhile, power infrastructure provider Alstom expects coal to be big across Asia. Alstom says close to half of the 600 gigawatts of new power generators built over the next five years will be coal-fired.
Southeast Asia will see the biggest coal boom. The International Energy Agency says coal will generate nearly half of Southeast Asia's electricity by 2035, up from less than a third now. As Asia's insatiable demand for coal continues to increase, coal prices should stabilize and gradually rise.
There are a number of ways you can play a rebound in coal prices. One easy way is to buy the Market Vectors Coal ETF (NYSE: KOL). This ETF tracks the performance of the Market Vectors Global Coal Index. Its holdings are worldwide: - 45% in U.S. companies
- 16% in China
- 10% in Indonesia
- 7% in Australia
Holdings include CONSOL Energy (NYSE: CNX), Joy Global (NYSE: JOY) and Peabody Energy (NYSE: BTU). Volume is decent at more than 100,000 shares per day. Market Vectors also sports a dividend yield of 2.12%.
There's no question that coal companies have been a losing bet for several years running. But I'm expecting much better results for the industry in 2014... and beyond.
Regards,
Sean Brodrick
For Free Market Café
A Note From Eric: Sean Brodrick is our "Indiana Jones" - journeying to the four corners of the world to examine the "hidden treasures" that the world's resource companies are extracting from the earth. His boots-on-the ground research has taken him from the Arctic Circle to South America... and obscure regions beyond. As The Oxford Club's Resource Strategist, Sean is rarely content to take a secondhand look at mining and energy projects. But here's the interesting part of Sean's research: The resource sector is not just a game of picks and shovels anymore. It's also about examining the technologies at work to extract and process natural resources. In fact, in today's resource sector, technology often matters more than the stuff that's in the ground. Or, to put it another way, modern technologies have converted many formerly worthless oil and gas deposits into billion-dollar paydays... and Sean is on the case, as Marc Lichtenfeld explains here. | Photo originally posted by Arnold Paul and cropped by Gralo on Wikimedia Commons |
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