Coal is burned as fuel or gasified to create a synthetic gas
(syngas) that can then be used as feedstock for the production of
chemicals, fertilizer and electric power. Coal is also used for
producing heat through combustion.
Metallurgical coal or coking coal is used in steel production. Coal
remains a dominant source of power generation worldwide. In the
U.S., around 40% of total power generation capacity is coal fired.
The U.S., Russia, Australia, China, India and South Africa have the
largest coal reserves in the world. Coal is produced in 25 states
in the U.S. though the bulk of current production takes place in
just five states: Wyoming, West Virginia, Kentucky, Pennsylvania
According to estimates by the Energy Information Administration
(EIA), the country's current coal reserves will last for 168 years
at the current production rate. They will most likely last even
longer with environmental issues coming in the way. However, if the
fuel's environmental standing can be improved, there could
potentially be new sources of end-market demand in the future, in
communications and transportation systems, computer networks and
even space expeditions.
As per the World Coal Association (WCA), proven global coal
reserves will last nearly 112 years at current production rates. On
the other hand, proven oil and gas reserves are projected to last
around 46 years and 54 years, respectively, at current production
levels. Asia is the biggest coal market and presently accounts for
67% of the global coal consumption.
President Obama's Climate Plan, which aims to lower carbon
pollution in America, could impact the future prospects of the coal
companies. Power plants in the U.S. are responsible for nearly 40%
of greenhouse gas emissions in the country, and the majority of
these units use coal as its fuel.
The president's plan calls for implementation of carbon
pollution standards for both existing and upcoming coal-fired
units, which in a way could make coal-fired units more expensive
and less attractive for operators. The electricity generators to
avoid the stringent regulation could decide to erect power plants
using natural gas or alternate sources, which will lower the demand
for coal and impact the future profitability of the U.S. coal
The European Investment Bank (EIB), said it would stop financing
majority of coal-fired power stations to help the European Union's
28-nation coalition reduce environmental pollution. This decision
is in sync with President Obama's plan to cut down global emission.
New coal units will not be funded unless the emission level is less
than 550 grams of carbon dioxide per kilowatt-hour (gCO2/kW).
Zacks Rank - Negative Outlook
The Zacks Industry Rank, which relies on the same estimate
revisions methodology that drives the Zacks Rank for stocks,
currently puts the Coal industry at 232 out of 259 industries in
our expanded industry classification. This puts the industry in the
bottom third of all industries, corresponding to a negative
The way to look at the complete list of 259+ industries is that the
outlook for the top one-third of the list (Zacks Industry Rank of
#85 and lower) is positive, the middle one-third of the list (Zacks
Industry Rank of #86 to #169) is neutral while the outlook for the
bottom one-third (Zacks Industry Rank #170 and higher) is negative.
Please note that the Zacks Rank for stocks, which is at the core of
our Industry Outlook, has an impressive track record going back
years, verified by outside auditors, to foretell stock prices,
particularly over the short term (1 to 3 months).
None of the 18 companies in the Coal industry has a Zacks Rank #1
(Strong Buy); only two have Zacks Rank #2 (Buy), while 7 have
either Zacks Rank #5 (Strong Sell) or Zacks Rank #4 (Sell). The
other 9 have Zacks Rank #3 (Hold). Overall, the Zacks Rank for the
industry and for individual stocks indicate our bearish outlook.
Earnings Review and Negative Outlook
The companies haven't reported Q2 results yet, but in terms of Q1
Alliance Resource Partners LP
Alliance Holdings GP, L.P.
Alpha Natural Resources Inc.
Natural Resource Partners L.P.
Rhino Resource Partners LP
Walter Energy Inc.
Peabody Energy Corp.
James River Coal
Hallador Energy Company
) came out ahead of expectations. In total, 54% of the coal
companies in our coverage came out with positive earnings surprises
in the first quarter, below the 65% average for the S&P 500 as
Second quarter earnings are on its way with the majority of the
coal companies expected to report earnings within the next
fortnight. The beginning of coal industry releases was quite bright
with Peabody Energy surging ahead of market expectations in its
Can the other operators in the coal industry match the
performance of Peabody? We expect second quarter 2103 performance
of most coal stocks in our coverage universe to decline from the
Coal Dominates U.S. Power Generation:
Coal as a major source of fuel for power generation dominates the
Utility industry. Coal is used to generate about half of the
electricity consumed in the U.S. and is also the largest
domestically-produced source of energy. Electricity generation
absorbs about 93% of total U.S. coal consumption. The reason is
simple: coal is by far the least expensive and most abundant fossil
fuel in the country, though the emergence of large shale natural
gas reserves is expected to pose tough competition going forward.
The EIA report also suggests U.S. coal production will increase by
1% in 2013 and 1.3% in 2014, primarily due to an expected rise in
natural gas prices from 2012 levels. The relative increase in
U.S. natural gas price, compared to coal, will also increase the
share of coal in electricity generation. The EIA report suggests
coal's share in electricity generation in 2013 will reach 39.5%, up
from 37.4% in 2012.
A recent release from the EIA indicates that total coal consumption
will increase by 7.1% from 890 million short tons (MMst) in 2012 to
954 MMst in 2013, as consumption in the electric power sector rises
due to higher electricity demand and higher natural gas prices.
Coal consumption will grow at a more modest pace of 1.8% to touch
970 MMst in 2014.
Not Just Electric Generation:
Electricity generation is just one use of coal in the U.S.
Manufacturing plants and industries use coal to make chemicals,
cement, paper, ceramics and metal products, to name a few. Methanol
and ethylene, which can be made from coal gas, are used to make
products such as plastics, medicines, fertilizers and tar.
Certain industries consume large amounts of coal. For example,
concrete and paper companies burn coal, and the steel industry uses
coke and coal by-products to make steel for bridges, buildings and
Coal as an Input for Steel Industry:
Due to its heat-producing feature, hard coal (metallurgical or
coking coal) forms a key ingredient in the production of steel.
Nearly 70% of global steel production depends on coal. Any
improvement in the production of steel will also bring in fresh
demand for coking coal. Global steel usage is expected to increase
in 2013 and 2014, which will benefit the coal industry.
Demand Upsurge in Asian Countries:
The increase in coal demand in the Asian economies of China and
India has been a key price driver. We expect this trend to continue
in the future, mainly due to the growing energy needs in India,
China and South Korea.
Of the Asian countries, economic growth in China and India will be
the fastest. These two countries do produce coal, but its domestic
coal production has yet to match the growing demand, resulting in
the continuous need for importing coal. These countries rely
heavily on coal for electricity generation.
It is estimated that by 2035, 60% of the world's coal-fired units
will be located in China and India. It is quite obvious from the
current rate of production that these two countries will have to
make bulk coal imports to run its units. So, the future prices of
coal and the growth of coal stocks will to a large extent depend on
these two countries.
As per a WCA report, 36% of China's global investment is directed
towards advanced coal technology, which we believe is a good sign
for the coal industry. The Chinese government is taking active
steps to endorse the use of clean technologies, as China has been
one of the largest green house gas emitters.
We believe the infusion of funds from China and India would help
the U.S. coal producers. As it is these coal companies have been
hard pressed in 2012 with dwindling demand forcing them to idle a
few coal mines.
Given the lackluster coal market at home, coal companies are
looking to export coal to the fast growing Asian economies. Some of
the names making the most from overseas coal exports are Peabody
Energy Corporation and
CONSOL Energy Inc.
). During the second quarter
Arch Coal Inc.
) opened operations in Beijing to tap the growing metallurgical and
thermal coal demand in the South Asian markets.
According to an EIA report, U.S. coal exports in 2012 were 126
MMst, which reflected growth of 17.8% year over year, driven by
Asian countries. EIA forecasts US coal export will be 110 MMst in
both 2013 and 2014. The continued weakness in Europe, decline in
international coal prices and increase in production from other
coal exporting countries will weigh on U.S. exports in 2013-14.
Besides Australia and Russia, which has the second largest coal
reserve next only to U.S, the U.S. coal exporters could face
competition from Indonesia. Indonesia is the world's largest
exporter of thermal coal and its proximity to China and India will
give it a geographical advantage over the U.S.
Coal is plentiful and fairly cheap relative to the cost of other
sources of electricity, but its use produces emissions that
adversely affect the environment. Coal emits carbon dioxide, sulfur
dioxide, nitrogen oxide and mercury, which have been linked to acid
rain, smog and health issues.
With governments becoming more and more stringent on environmental
issues, the electricity generators are implementing new measures to
bring down emission levels of greenhouse gases.
Sluggish Economic Recovery:
The sluggish pace of economic recovery in the U.S. has to a great
extent eroded demand for coal. This has pushed a few of the large
operators to lower production, idle mines or even shut down mines
permanently to realign output with diminishing demand.
In 2012, Alpha Natural Resources Inc. decided to shut eight
mines in Virginia, West Virginia and Pennsylvania. Peabody Energy
decided to permanently close its Air Quality Mine in Vincennes,
Indiana. The tepid demand for coal was making the operation of this
mine uneconomical, leading to its shutdown.
Coal has been losing its importance as a fuel source over the last
few years, particularly in the U.S., vis-à-vis other sources that
have a lesser impact on the environment. Concerns on the emission
of greenhouse gases and global climate change have resulted in the
formulation of new legislations and policies which emphasize on the
use of environment friendly fuel sources, particularly in the power
Natural Gas Substituting Coal:
A major substitute for coal in energy generation is natural gas.
Coal is being dumped in favor of natural gas because of its
relative fuel efficiency, low emissions, quick construction
timelines and low capital costs.
There is an abundance of natural gas in the U.S. market and its
usage is eco-friendly. Power generators are not only converting
their existing plants to gas-fired ones but are also building new
nat-gas units to meet regulatory standards.
As per EIA's reports, 96.65 GW of new electric generation will be
added in the U.S. within 2009-2015, of which 20% will be natural
The share of natural gas for power generation is projected to grow
from 24% in 2010 to 30% in 2040, as per the EIA's long-term
Competition from Alternative Energy Sources:
Apart from natural gas, the coal industry has been losing a major
share to renewable sources of energy like wind, solar and hydro
Production of power from renewable sources has also been supported
by various U.S. states. Undoubtedly, state legislators are laying
more emphasis to produce power from renewables. Thirty-five U.S.
states and the District of Columbia have enforceable renewable
portfolio standards or other renewable generation policies. These
policies were designed to spread awareness and encourage the power
generators to produce more from renewable sources.
As per an EIA release, renewable energy's share of total energy use
(including biofuels) would improve from 9% in 2011 to 13% in 2040.
This increase comes at the expense of coal-fired units.
EIA reports point out that coal consumption in the U.S. was up by
11% in the first quarter of 2013 versus the same period last year.
However, the increase in coal consumption was not a function of
rising demand for the fossil fuel.
In fact, the demand for coal decreased 5% over the same period.
The rise in consumption maybe attributable to utility companies
burning down their stockpiles to meet the demand for power.
Cloud Peak Energy Inc.
) registered a decline in coal shipments in the first half of the
year, which did not come as a surprise, as the accumulated
stockpiles at the utilities delayed fresh orders.
To Sum Up
Despite the stringent legislations and regulations regarding
coal-fired generation, we could see some positive news for the coal
industry. A release from Peabody Energy indicates that between 2012
and 2017, 425 gigawatts of new coal-fired generation is expected to
come online globally, increasing annual world coal demand by nearly
1.2 billion tons.
The majority of the addition will be commissioned in the developing
economies, where domestic coal production is far lower than
consumption. This opens up new opportunities for coal shipments for
US coal majors.
The World Steel Association projected nearly 3% year-over-year
growth in global steel usage in 2013 and 2014. Since met coal is a
necessity in steel production, positive steel fundamentals can
drive the demand for met coal. In addition, rising natural gas
prices in the U.S. will also help in the revival of coal demand for
generation of electricity.
Transportation determines the pricing of coal to a large extent in
the U.S. as it needs to be transported over large distances to
reach its end-markets. An EIA report says that in the U.S., on
average, transportation costs increase the price of coal by 40% and
these costs have increased by 50% over the last decade. If
transportation costs go up substantially in a short span of time,
it will definitely have a negative impact on demand, domestically
as well as in international markets.
If Chinese and Indian imports look encouraging, the lingering debt
crisis in Europe continues to cast a pall over coal fundamentals.
Despite relief packages, the crisis in Europe is far from over and
will continue to restrain coal demand.
The coal companies are nevertheless working on the technology
aspect with the aim of achieving near-zero emissions. Clean-coal
technology development in the U.S. also has funding earmarked under
the American Recovery and Reinvestment Act of 2009. This is an
encouraging sign for coal producers.
There is no denying that in the U.S. coal continues to lose its
ground to other fuel sources for power generation. As per EIA, coal
will continue as the largest source of electricity generation, but
its share of total electricity generation, which was 51% in 2003,
would decline to 35% in 2040. Renewable energy sources and natural
gas powered units will be the main beneficiary of the lost ground.
Renewables and nat gas will come up in a major way in the next
All said, even if alternate sources of fuel generation are
available, coal's advantage lies in its price, which is far cheaper
than other sources of fuel. If we look at the global picture, it is
evident that cheap source of reliable power is a driving factor for
economic development. Reinvigorating demand from growing economies
and steady demand from the U.S. will continue to drive the coal
industry in the future. In other words, we are not yet ready to
sing coal's swansong.
ALLIANCE HLDGS (AHGP): Free Stock Analysis
ALPHA NATRL RES (ANR): Free Stock Analysis
ALLIANCE RES (ARLP): Free Stock Analysis Report
HALLADOR ENERGY (HNRG): Free Stock Analysis
JAMES RIVER CL (JRCC): Free Stock Analysis
NATURAL RSRC LP (NRP): Free Stock Analysis
RHINO RESOURCES (RNO): Free Stock Analysis
WALTER ENERGY (WLT): Free Stock Analysis Report
To read this article on Zacks.com click here.