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| Brought to you by The Oxford Club | Saturday, April 30, 2016 |
The World's Dirtiest Fuel Won't See the Light of Day
 On April 13, the world's largest coal company went bust. Peabody Energy, with more than $6 billion in debt, filed for bankruptcy protection under Chapter 11.
And it's not just Peabody feeling the crunch... In the last 18 months, five of America's largest coal miners have gone bankrupt. These include Alpha Natural Resources and Arch Coal.
The recent commodities rally has left coal in the dust (pun intended).
In the U.S., stricter EPA greenhouse gas emissions regulations forced utilities to abandon more than one-third of their coal-fired plants.
But right now, the biggest threat to coal is the horizontal drilling and hydraulic fracking revolution. It's led to what I refer to as the "shale gale," a massive, highly disruptive surplus of natural gas. This has made natural gas cheaper than coal and has propelled it to become the fuel of choice for electricity generation in the U.S.
It's also less of a hassle and cheaper to obtain... Producers deliver natural gas in pipelines, and utilities burn it right away.
Coal, on the other hand, comes in open-top rail hopper cars. Long trains of 100 or more of these cars spread coal dust everywhere they go. In addition, utilities using coal have to maintain an inventory stockpile in the event of a supply disruption.
The decision to build new natural gas-fired plants doesn't hinge on proximity to a rail line or the ability to maintain a costly inventory of fuel.
Natural gas use for power generation is going to keep a lot of coal right where it is: in the ground.
And as you can see, over the past five years, natural gas has been cutting into coal's claim as a primary fuel source in the U.S.
And it's not just happening in the U.S. Coal is running into headwinds abroad too.
Great Britain expects that all of its coal-fired power plants will be gone by 2025.
And for the second year in a row, China's demand for thermal coal fell in 2015.
Due to China's slowing economic growth, its steel production has been in steep decline. Because of the role coal plays in steelmaking, a decline in production severely cuts the demand for coal.
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There are widely held perceptions that China's coal-fired power plant numbers are increasing. They are not.
On the same day that Peabody filed for bankruptcy, China's National Energy Administration halted approval of any new coal-fired generation plants in all but three of its 31 provinces.
The Final Nail in the Coffin
In addition to the "shale gale" and declining production abroad, solar and wind energy are putting pressure on coal-fueled power plants.
Many utilities already operate large-scale solar plants or wind farms.
On a recent flight to California, my wife had the window seat and couldn't believe how many wind and solar installations she saw. "They seem to be everywhere you look," she said.
She's right. Solar and wind installations are popping up all over the U.S.
In the Midwest, fields of wind generators stretch to the horizon. They're taking advantage of the near-constant winds that blow across the plains states.
In the case of solar, many utility-scale installations are appearing in the deserts of the Southwest. Land that is of little use for anything else is perfect for a giant solar field.
And once utilities can store their renewable energy to use during peak times, coal will be a goner.
Battery storage costs are tumbling about 6% annually. In a few years, adding battery storage to new and existing solar and wind installations will be a no-brainer for utilities.
So when will coal see its final hour?
Remember Dave's Laws of Technology: - Technology marches on.
- When it comes to technology, changes happen much faster than you'd expect.
- Initially, new technology can be uncomfortably disruptive.
My second law of technology has the answer. Coal will become an antiquated form of power generation a lot faster than anyone thinks. We're already beginning to see it.
Once that happens, coal will take up a miniscule - if not nonexistent - portion of the power generation pie.
Good investing,
Dave
P.S. I'll be speaking in more detail about the coming disruption in power generation at the Club's upcoming Private Wealth Seminar in Stowe, Vermont. The Club's World Financial Seminars Team knows how to throw a classy event. You won't want to miss it. You can claim your spot and your Early Bird Discount if you sign up by tomorrow. Click here for more information.
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Right now, the dollar is strong. And commodities are cheap.
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There's one investment that's perfect. It's a way to invest in commodities where your principal is 100% protected by the FDIC... and where your gains can go as high as 70%.
It's one of four steps laid out here to profit from the coming dollar bear market. |
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