Coal has been used for nearly as long as mankind has thrived.
From the times of the cavemen to present day, coal is used for
everything from cooking to heating to running steam-powered trains
to generating electricity.
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Today, coal is burned as fuel or gasified to create a synthesis gas
(syngas) that can then be used as a feedstock for the production of
chemicals, fertilizer and electric power. Coal is also used for
producing heat through combustion.
The USA, Russia, Australia, China, India and South Africa have the
largest coal reserves in the world. Coal is produced in 25 states
in the US, spread across three coal-producing regions. The majority
of the current production originates in just five states: Wyoming,
West Virginia, Kentucky, Pennsylvania and Montana.
The importance of coal as a source of generating power has
increased over time with the rise in industrialization. In due
course, alternatives to coal for generating power have now curbed
the dominance of coal to some extent.
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.
Coal will continue to dominate as the major source of electricity
production. Taking into consideration the long-term prospect of
coal, one of its key producers
Arch Coal Inc.
) expanded its reserves in the Powder River Basin ("PRB") through a
successful bidding of a coal lease. The coal produced from South
Hilight coal reserves are of high quality. This high quality,
ultra-low-sulfur-dioxide-content coal is in huge global demand due
to stringent government regulations on emission (pollution)
In contrast, petroleum and nuclear power as sources of power
generation have been losing market share displaced by the strong
growth of renewable sources of generation and natural gas-fired
generation. Petroleum is losing out to coal because it is becoming
increasingly expensive. After the Japan earthquake/tsunami incident
in 2011, nuclear power's contribution to the total energy
generation has declined from the prior year.
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, today hard coal (metallurgical
or coking coal) forms a key ingredient in the production of steel.
Nearly 70% of global steel production depends on coal. The steel
companies foresee a return of prospects in 2012 due to improving
demand from the end markets.
According to an Energy Information Administration (
) report, U.S. coal exports in 2011 were 107 million short tons
(MMst), which reflected growth of 31% year over year. Flooding in
Australian mines during 2011 disrupted coal exports, which
benefited US producers. The upsurge in coal exports during 2011
mainly emanated from demand from Asian countries. As per the EIA
report, with Australian mines back in operation, U.S. coal exports
are expected to decline to 100 MMst in 2012.
The projected average delivered coal price to the electric power
sector, which was $2.40 per MMBtu in 2011, is expected to fall to
$2.38 per MMBtu in 2012 and $2.30 MMBtu in 2013. The downside is
attributed to lower demand for coal in generating electricity.
Demand Upsurge in Asian Countries:
The increase in coal demand in Asian economies like China and India
has been a key price driver since the end of the recession in 2009.
We expect this trend to continue in 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 of importing coal. These countries rely heavily
on coal for electricity generation.
A major portion of the new electricity generation units, which are
expected to come up in these two countries, will utilize coal as a
source of fuel. As per
The Economic Times
, it is projected that coal imports will touch 1 billion tons in
China in 2030 from the present level of 175 million tons in 2011.
Indian imports for coal are expected to reach 400 million tons in
2030, up from 80 million tons in 2011.
Given the growing demand from the fast-growing Asian economies,
companies find it attractive to export coal to the emerging
regions. Some of the names making the most from overseas coal
Peabody Energy Corporation
CONSOL Energy Inc.
). To cater to the increasing demand of coal in Asian countries,
Peabody has acquired Macarthur Coal in Australia and expanded its
footprint in high-demand regions.
Elsewhere, certain coal master limited partnerships (
Penn Virginia Resource Partners L.P.
Natural Resource Partners L.P.
Alliance Resources Partners L.P.
), are also good investment bets for people seeking exposure in the
According to the EIA's report, U.S. coal production in 2012 will
experience a dip from the last five-year average. The projected
decline is attributed to lower demand due to adverse weather
conditions, large stock of coal and increasing competition from
natural gas as an alternate fuel.
In the ensuing year, the demand for coal to produce power is likely
to fall 10% from the previous year due to increasing use of natural
gas to generate power. EIA forecasts coal use in the U.S. power
sector to fall below 900 million short tons in 2012 and 2013.
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 sulfur dioxide,
nitrogen oxide and mercury, which have been linked to acid rain,
smog and health issues. Coal also emits carbon dioxide, a
greenhouse gas that contributes to climate change.
Without proper care, coal mining can have a negative impact on
ecosystems and water, and alter landscapes and scenic views. 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.
As per an EIA report, the combined impact from the usage of natural
gas and renewable sources to generate power will gradually reduce
the share of coal to produce electricity to 39% in 2035 from the
high of 49% in 2007.
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
This has considerably slowed the expansion of coal-fired capacity
in the power sector, with utility companies now building new
natural gas-fired plants and resorting to alternative sources of
energy generation like wind, solar and hydro power. To meet the
American Electric Power
) has decided to retire 4,600 megawatts (
) of coal-fired generation from its portfolio.
Natural Gas Substituting Coal:
A major substitute for coal in energy generation is natural gas.
Coal is being dumped in favor of natural gas, which due to
extensive exploration and production, is seeing significantly lower
prices than in the past.
Natural gas is usually an attractive choice for new generating
plants 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. markets, resulting in lower
prices. This trend is encouraging power generators to not only
convert their existing plants to gas-fired ones but to build new
Electric generation through gas-fired plants is likely to become
more competitive over the coming years given its abundant domestic
availability and the threat of regulation hanging over the coal
mining industry. As per EIA's reports, 96.65 gigawatts (
) of new electric generation will be added in the U.S. within 2009
-2015, out of which 20% will be natural gas-fired plants.
Large electricity generators in the U.S., like
) and others are turning to natural gas for additional electrical
Competition from Alternative Energy Sources:
Apart from natural gas, the coal industry has been losing a major
share of its electric generation demand to renewable sources of
energy like wind, solar and hydro power.
Production of power from renewable sources has also been supported
by the various U.S. states. At present there is no national
consensus regarding the percentage of energy to be generated from
renewable sources by the power generators.
Undoubtedly, state legislators are giving more emphasis to produce
power from renewables. At present, 30 U.S. states and State 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.
The share in energy generation of renewable fuels (including
conventional hydro) is projected to grow from 10% in 2010 to 16% in
2035, as per the EIA's long-term outlook.
Though there is ample pressure on coal from legislations and
increasing competition from natural gas and renewable energy
sources, we believe the global power industry will continue to
depend on coal for a large part of its generation. Coal as a fuel
source will continue to power the growth in emerging nations like
China and India, both for utility companies and steel makers as it
is cheaper compared to other energy sources.
On the flip side, the debt crisis in Europe is still lingering,
despite relief packages that have already been announced to revive
the economy. The uncertain economic climate continues to impact the
industry and curb its growth prospects. The lackluster demand for
steel, which is widely used in different industries, could be an
indicator of where we are heading.
), a major producer in the global steel industry, has as yet idled
5 of its 25 blast furnaces in Europe due to tepid demand. Likewise,
demand for coal is expected to decline in Europe as the steel
industry consuming a large volume of high quality coal continues to
The EIA estimates, even if no new reserve is added, the present
U.S. coal reserve will exhaust in 168 years, taking into
consideration the incremental production rate. This is promising
because, in addition to the many existing ways to use coal, the
future holds new methods and potential for growth. Products from
coal may soon be part of communications and transportation systems,
computer networks and even space expeditions.
In addition to these new and increased uses of coal, new
technologies will continue to enhance the ability to identify the
shape and composition of untapped coal reserves. Emerging know-how
is also likely to look for a solution to the adverse effects of
coal on the environment mitigating greenhouse effects and other
For example, the dry sorbent injection pollution control technology
can play an important part in coal usage in the power plants. This
technology will aid the power plant operators using coal to lower
SO2 emissions and enable them to comply with the Environmental
Protection Agency's Mercury and Air Toxics Standards (
These new technologies focused on achieving near-zero emissions
open up avenues for potential long-term industry growth. 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.
Even if alternate sources for generating fuels are available,
coal's advantage lies in its price, which is far lower than the
other sources of fuel. We believe reinvigorating demand from
the growing economies and steady demand from U.S. will drive the
coal industry in the future.