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. According to the Energy
Information Administration (EIA), coal still plays an important
role in the U.S. in the generation of power. However, natural gas
is eating away its share at a very fast pace. As per the EIA,
coal's annual share of total power generation in the U.S. declined
from 50% in 2007 to 37% in 2012. The usage of natural gas and
alternate sources for power generation will continue to pose
challenges to coal.
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 EIA, the country's current coal
reserves will last for 168 years at the current production rate.
They might in all likelihood 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
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.
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 green house gases. The U.S.
government has been pretty vigilant, enforcing stricter regulations
on coal-fired generating units to curb pollution.
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. If the new regulations are implemented it will
increase the cost of power generation from coal fired plants.
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 companies?
Moreover, Europe is a big export market for the U.S. coal
producers. The European Investment Bank (EIB) said it would stop
financing the majority of coal-fired power stations to help the
European Union's 28-nation coalition reduce environmental
pollution. New coal units will not be funded unless the emission
level is less than 550 grams of carbon dioxide per kilowatt-hour
Given the mounting environmental pressure, there is definitely a
push away from coal as a power source. However, on a global scale,
coal still leads the way. There is still hope for coal companies if
they can produce high-efficiency coal. Technological advancement
and carbon capture and storage offer possible remedies for coal's
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 104 out of 259 industries in
our expanded industry classification. This puts the industry in the
middle 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).
None of the 20 companies in the Coal industry under our coverage
has a Zacks Rank #1 (Strong Buy); 2 have a Zacks Rank #2 (Buy),
while 2 have a Zacks Rank #4 (Sell) and none are rated Zacks Rank
#5 (Strong Sell). The other 16 have Zacks Rank #3 (Hold). Overall,
the Zacks Rank for the industry and for individual stocks indicate
our neutral stance on the industry.
Earnings Review and Outlook
The coal industry's overall earnings results in the third quarter
were on the softer side. However, the top four U.S. coal producers,
Peabody Energy Corporation
Arch Coal Inc.
Alpha Natural Resources Inc.
Cloud Peak Energy
(CLD) either surpassed the consensus estimates or were in line with
expectation. CONSOL Energy Corporation (
), holding the 5th position, posted third quarter earnings much
lower than the consensus.
In total, 53% of the coal companies in our coverage either met or
came out with positive earnings surprises in the third quarter,
below the 65.3% average for the S&P 500.
The upcoming earnings releases in the fourth quarter are expected
to remain soft as well. As per our current projection, Peabody
Alliance Holdings GP, L.P.
James River Coal
), Arch Coal Inc. and
Oxford Resource Partners, L.P.
) are expected to surpass year-ago earnings.
Fourth quarter earnings of
Alliance Resource Partners LP
), CONSOL Energy, Cloud Peak Energy and Alpha Natural Resources
Inc. are however expected to decline year over year.
We note that the demand for power fluctuates with seasons and a
harsher winter may see higher demand for electricity and in turn
more robust coal sales.
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 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.
Coal production for the first three quarters of 2013 was estimated
at 752 million short tons (MMst), 15 MMst (2%) lower than in the
same period of 2012. EIA projects total coal production of 1,012
MMst in 2013, marginally down from the 2012 level of 1,016MMst.
At present, U.S. coal stockpiles have come down to nearly 150
million tons, which could lead to an increase in production in the
coming year. As per EIA, coal production will grow by 2.7% in 2014
to 1,039 MMst as inventories stabilize and consumption increases.
EIA indicates that total coal consumption will increase by 4.4%
from 890 million short tons (MMst) in 2012 to 930 MMst in 2013, as
consumption in the electric power sector rises due to higher
electricity demand. U.S. coal consumption will however grow at a
more modest pace of 2.8% to touch 957 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 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.
A recent release from the World Steel Association revealed that
worldwide steel production was 134 million tons (Mt) in Oct 2013,
an increase of 6.6% as compared to Oct 2012 (data from 65
countries). 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 up its demand.
Demand Upsurge in Asian Countries:
The growing economies of Asia, with ongoing infrastructural
development, could keep the U.S. based coal producers afloat. Even
if the current pace of economic development in these countries has
turned a little sluggish, increasing coal imports from these
countries will definitely boost the fortunes of the U.S. coal
Some of the big names making the most from overseas coal exports
are Peabody Energy Corporation and Alpha Natural Resources, Inc.
During the second quarter of this year Arch Coal Inc. opened
operations in Beijing to tap the growing metallurgical and thermal
coal demand in South Asian markets.
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. In addition, the nuclear debacle in Japan
led the country to import coal to generate electricity.
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
increasing need of imports. These countries rely heavily on coal
for electricity generation.
At present nearly 70% of China's electricity is generated from
coal-fired power plants. The country is also taking active steps to
close down on the high operating cost coal mines. This is wont to
create opportunities for U.S. coal exporters.
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.
Acquisitions, Merger and Sell Offs:
Selective acquisitions and strategic mergers could also turn
profitable for U.S. coal operators. In addition, they could also
monetize some of their mature coal assets and use the proceeds to
further develop their high-quality, low-cost mines. There will
always be a market for the high variety coal that emits lesser
green house gases.
In August, Arch Coal Inc. decided to sell its Canyon Fuel Assets
for $423 million and intends to use the proceeds in assets having a
better growth potential. The present focus is definitely on
maintaining a balanced production portfolio with a focus on high
quality coal mines having lower operating costs.
Per a media report, International Coal Ventures Ltd., a joint
venture between four top state-run companies in India, is planning
to acquire four overseas coal mines for $1 billion. We believe that
U.S. coal operators have a very high chance of being a part of the
deal, given the high quality of coal and the existing
infrastructure in the mines.
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
demand from Asian countries. EIA forecasts U.S. coal export at 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. U.S. coal exports are nevertheless expected to reach 155
MMst in 2017-18.
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.
The slower pace of economic recovery is also reducing the realized
price of coal. EIA predicts average coal prices in the utility
industry to decrease to $2.34 per million British thermal units
(MMBtu) in 2013 from $2.40 per MMBtu in 2012.
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.
The climate action plan from President Obama, followed by the U.S.
Environmental Protection Agency's (EPA) proposal for implementing
more stringent guidelines for setting up new coal power plants, is
putting immense pressure on power producing units.
EPA's new proposal suggests a new coal-based power plant will have
to limit carbon emission to 1,100 pounds of CO2 per megawatt-hour.
In addition, coal based power generators would have the option to
meet a somewhat tighter limit if they opt for an average emission
over multiple years.
The new recommendation will make electricity generation from coal
units far more costlier than before. This will definitely have an
adverse impact on coal usage for power generation in the U.S.,
ultimately hurting coal producers.
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
Very recently, CONSOL Energy decided to sell a large chunk of its
coal assets and utilize the proceeds to further develop its natural
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.
Even though the percentage of electricity production from renewable
sources is not uniform across all states in the U.S., the objective
behind this move is common. They are all eager to cut down on
greenhouse gas emission.
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 inevitably comes at the expense of coal-fired units.
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 could see some
positive news for the coal industry. A release from Peabody Energy
indicates a 15% to 20% recovery in metallurgical coal prices from
third quarter levels.
There is no denying that in the U.S. coal continues to lose 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. This will be still substantial given the
expected rise in U.S. electricity generation in the next few
An EIA report also suggests that in the U.S. within the 2012 to
2016 timeframe nearly 27 Gigawatts (GW) of coal generation capacity
will be retired, which is nearly four times the 6.5 GW retired in
the prior five-year period. Renewable energy sources and natural
gas powered units will be the main beneficiary of the lost ground.
Renewables and natural gas will come up in a major way in the next
The gradual shutdown of coal-fired units has started to take its
toll on employment levels, as per the data released from the U.S.
Bureau of Labor Statistics (BLS) in the first 10 months of 2013.
U.S. coal employment was down 2.2% from the same period last year.
We believe unless resolved the job loss could create a serious
problem for the administrators.
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.
ARCH COAL INC (ACI): Free Stock Analysis Report
ALLIANCE HLDGS (AHGP): Free Stock Analysis
ALPHA NATRL RES (ANR): 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
OXFORD RES PTNR (OXF): Free Stock Analysis
WALTER ENERGY (WLT): Free Stock Analysis Report
To read this article on Zacks.com click here.