Coal plays a vital role in the economic development of a country.
Coal not only provides a cheap source of electricity production but
also creates employment opportunity for thousands of people. Coal
with its heat generating capability also plays an essential role in
the chemical, fertilizer and steel industries.
Coal is a dominant source of power generation worldwide despite the
increasing use of other resources. Coal still plays an important
role in the U.S. in the generation of power. However, natural gas
and renewables are eating away its share at a rapid pace. The usage
of natural gas and alternate sources for power generation will
continue to pose challenges to coal.
According to estimates by the U.S. Energy Information
Administration (EIA), the country's current coal reserves will last
for 168 years at the present production rate. They might in all
likelihood last even longer with environmental issues coming in the
way. There is no denying the manifold advantages of coal. However,
unchecked usage of this fossil fuel has raised concerns in all
quarters. The primary cause of concern related to coal is global
warming caused by the emission of greenhouse gases.
President Obama's Climate Plan, followed by the U.S. Environmental
Protection Agency's (EPA) proposal for granting permission for
setting up new power plants, is putting immense pressure on power
producing units. In the light of these issues, if the U.S.
electricity generators opt for natural gas for power generation and
invest more in alternate sources, what will be in stake for coal
Given the mounting environmental pressure, there is definitely a
move away from coal as a power source. Per a report from Industrial
Info Resources, active coal mining projects in the U.S. have
declined by 39% from 2011 levels. Per the report, there were $12.3
billion worth of active coal projects in 2011, which declined to
$7.5 billion in 2013.
Facts indicate the importance of coal is gradually waning in the
U.S. Will investments in coal stocks fail to generate adequate
returns? Coal has lost ground for sure, but it is still a
long way to go before it actually runs out of steam.
On a global scale, coal still leads the way. There is hope for coal
companies if they can produce high-efficiency coal. Technological
advancement and carbon capture and storage offer possible remedies
for coal's future.
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 91 out of 259 industries in our
expanded industry classification. This puts the industry in the mid
third of all industries, corresponding to a neutral outlook.
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).
Of the 18 companies belonging to the coal industry in our coverage
1 has a Zacks Rank #1 (Strong Buy); 1 has a Zacks Rank #2 (Buy),
while 2 have a Zacks Rank #4 (Sell) and none are rated Zacks Rank
#5 (Strong Sell). The other 14 have a Zacks Rank #3 (Hold).
Overall, the coal industry has been through troubled times in 2013,
with some signs of improvement in 2014. Our Zacks Rank for
individual stocks indicates the possibility of a gradual recovery
in the industry.
Earnings Review and Outlook
The coal industry's overall earnings results in the fourth quarter
were on the softer side. U.S. coal producers
Peabody Energy Corporation
Alliance Resource Partners, L.P.
Natural Resources LP
Alliance Holdings GP, L.P.
Cloud Peak Energy
), among others, surpassed the consensus estimates.
In total, 55% of the coal companies in our coverage either met or
came out with positive earnings surprises in the fourth quarter,
below the 64.3% average for the S&P 500.
In 2013, the coal industry was impacted by lower realized prices
and increasing usage of natural gas and renewable sources for power
production. At the same time a supply glut in most regions were
putting downward pressure on coal prices. Unavailability of
railroad services impacted the operations of some miners.
The upcoming earnings releases in the first quarter are expected to
remain soft as well. As per our current projection, Peabody Energy
James River Coal
) are expected to surpass year-ago earnings.
Coal operators have recognized that tough times are ahead and are
adhering to stringent measures to improve their financial
performance. Miners have taken initiatives to lower cost while
engaging in tactful capital expenditures to assure the safety of
mine operations. The miners are shutting down high cost coal mines
and moving their operations to low cost regions. Longwall coal
mining techniques are also having a positive impact on production.
A World Steel Association report suggests a 3.3% increase in global
steel demand in 2014. This spike in steel demand might help met
coal producers like
Walter Energy Inc.
Rhino Resource Partners L.P.
) to boost profits.
Moreover, the demand for power fluctuates with seasons and a
harsher winter or a more torrid summer may see higher demand for
electricity and in turn more robust coal sales.
Coal Production & Consumption
Per an EIA report, U.S. coal consumption in 2013 was 923 million
short tons (MMst), which is expected to go up by 4.6% in 2014. The
projected increase in coal usage in the U.S. is attributable to
higher demand for electricity and the rising cost of natural gas.
However, coal consumption is expected to drop 3.1% year over year
to 936.1 MMst in 2015.
Per the EIA report, in sync with higher coal consumption, coal
production in the U.S. will increase by 3.2% to 1,027.5 MMst in
2014. The production is expected to decline by 1.4% year over to
1,013.1 MMst in 2015.
Per the same EIA report, U.S. coal exports in 2013 touched 118
MMst, 6.1% lower than export levels achieved in 2012. EIA pegs U.S.
coal export at 103.3 MMst and 98.9 MMst in 2014 and 2015,
respectively. The decline in export is a function of continued
economic weakness in Europe and higher production from other coal
Besides Australia and Russia, which has the second largest coal
reserve next only to the U.S., the U.S. coal exporters could face
competition from Indonesia. Australia is trying to tap demand in
the Chinese and Japanese markets, thereby posing a tough
competition to U.S. producers.
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. Electricity generation absorbs
about 93% of total U.S. coal consumption. Apart from the utilities,
coal is also used in various industries like chemicals, cement,
paper, ceramics and metal products, to name a few.
Given 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.
Demand for coal from the developing economies, primarily in the
Asian countries, is a driving force for the industry. Of the
emerging Asian countries, economic growth in China and India is
touted to be the fastest. These countries rely heavily on coal for
electricity generation. In 2013,
Arch Coal Inc.
) opened operations in Beijing to tap the growing metallurgical and
thermal coal demand in South Asian markets.
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. The sluggish pace of economic
recovery and a supply glut have put downward pressure on the price
of coal. EIA predicts average coal prices in the utility industry
to decrease to $2.36 per million British thermal units (MMBtu) in
2014 from $2.38 per MMBtu in 2012.
The U.S. government has been pretty vigilant, enforcing stricter
regulations on coal-fired generating units to curb pollution. The
climate action plan from President Obama, followed by the EPA's
proposal for implementing more stringent guidelines for setting up
new coal power plants if diligently followed will increase the cost
of producing electricity from coal, making it less attractive
compared to other fuel sources.
Increasing competition from natural gas and alternate sources of
power generation is gradually eating away coal's share in power
generation. We expect to see more of this trend going forward.
To Sum Up
At present the top four coal producers contribute more than 50% of
U.S. coal generation volume. Despite the stringent legislations and
regulations regarding coal-fired generation, we still see some
positive news for the coal industry.
The sudden increase in
and an unrelenting winter to start off 2014 in most parts of the
U.S. could have a positive impact on U.S. coal demand for the year.
The U.S. Bureau of Economic Analysis projects U.S. real GDP to grow
by 2.6% in 2014 and 3.2% in 2015. Total industrial production is
expected to increase 2.8% in 2014 and 4.0% in 2015. We find these
forecasts promising, as we expect a significant portion of
increased energy needs to be provided by coal.
As per the World Coal Association, 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. So,
among the fossil fuels, coal has the chance to last longer unless
strict environmental norms put coal out of business.
Asia is the biggest coal market and presently accounts for 67% of
the global coal consumption. China with its ongoing industrial
development consumes nearly 50% of the total global coal.
Industrialization in India is also perking up, leading to higher
coal consumption. Japan is also increasing its thermal coal usage
following the nuclear aftermath and the deactivation of the
We have also noticed a change in the product mix preference for a
prime coal producer.
CONSOL Energy Inc.
). This traditional coal miner has shifted its focus to natural gas
shedding most of its coal assets. The company has plans to divest
additional coal assets. Will this be a new trend among the coal
operators or just a stray example? Time will eventually reveal what
is in store for the sector and its leading players.
For now, coal operators are taking due precautions to safeguard
against freak accidents. However, a recent chemical spill into a
river in West Virginia is a harsh reminder that pollution from the
coal industry is an ever-present threat that can disrupt the living
Coal has a long list of drawbacks. But its advantage lies in its
price, which is far cheaper than other sources of fuel. The
availability of coal in most countries across the globe makes it a
widely accepted source of power generation globally.
If we look at the global picture, it is evident that a 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.
ARCH COAL INC (ACI): Free Stock Analysis Report
ALLIANCE HLDGS (AHGP): Free Stock Analysis
ALLIANCE RES (ARLP): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis
CLOUD PEAK EGY (CLD): Free Stock Analysis
CONSOL ENERGY (CNX): Free Stock Analysis Report
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
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