Coal has been used for nearly as long as mankind has thrived.
From the times of the cavemen to the present day, coal is used for
everything from cooking to heating to running steam-powered trains
to generating electricity.
Today, coal is burned as fuel or gasified to create a synthetic 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 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., spread across three coal-producing regions. The
majority of current production originates in just five states:
Wyoming, West Virginia, Kentucky, Pennsylvania and Montana. China,
the U.S., India, Russia and Japan account for 77% of total global
The importance of coal as a source of generating power increased
over time with the rise in industrialization. However, alternatives
to coal have now emerged, curbing coal's dominance to a certain
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 become a major competitor going
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.
Alliance Resource Partners, L.P.
), has acquired assets from Green River Collieries, which increased
its Illinois basin reserves by 40 million tons. This is apart from
the longwall operations in its Tunnel ridge mine, which increased
production to 300,000 tons in the second quarter. The partnership
has plans to gradually increase production from this mine, allowing
the partnership to fulfill its existing long-term coal sales
The moderate winter in the U.S. this year lowered the demand for
electricity, which in turn impacted the demand for thermal coal.
The stockpile in the power plants pushed down the prices of coal.
However, the warm summer has restored demand and much of the
stockpile has been lowered.
Admittedly, the dominance of coal as a source of electricity
generation has diminished with the availability of other fuel
sources. However, as per an Energy Information Administration (EIA)
report, coal will continue to be the major source of electricity
generation in the U.S. until 2035. Even in a worst case scenario,
coal will account for 36% of the U.S. electricity generation from
2010 to 2035 -- higher than any other form of fuel used to generate
The EIA report also suggests that the increase in demand for
electricity and an expected recovery in natural gas prices from
current depressed levels will result in a hike in coal production
post 2015. Coal production, after 2015, is expected to increase by
1% on an average per year until 2035.
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.
China is one of the largest global steel-producing countries and
has recently approved $23 billion in steel projects, which will
likely boost the demand for seaborne metallurgical coal.
According to an EIA 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 U.S. 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
Peabody Energy Corporation
), a major U.S. coal producer, expects an increase in the global
demand for coal for power generation and projects 90 Gigawatt (GW)
of new coal-fueled generation to come on line worldwide in 2012. We
believe Peabody with its U.S. and Australian platform stands to
benefit from the increase in demand for seaborne thermal coal.
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 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 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. As per The Centre for
Monitoring Indian Economy (CMIE), India's coal imports in 2012 are
expected to increase by 28.3% year over year to 127 million tons.
Given the growing demand from the fast-growing Asian economies,
companies find it attractive to export coal to emerging regions.
Some of the names making the most from overseas coal exports are
Peabody Energy Corporation and
CONSOL Energy Inc.
). To cater to the increasing demand for coal in Asian countries,
Peabody has acquired Macarthur Coal in Australia and expanded its
footprint in high-demand regions worldwide.
Since seaborne thermal coal demand is expected to rise, Peabody has
struck an agreement with
Kinder Morgan Energy Partners, L.P.
) to utilize the latter's Gulf Coast export platform. This
agreement will allow Peabody to increase its Gulf Coast annual coal
export capacity in the range of 5 - 7 million tons between 2014 and
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 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.
An EIA report suggests that in the next five years, between 2012
and 2016, U.S. power plant operators will retire around 27
gigawatts (GW) of coal-generation capacity from their production
portfolio. Tepid demand, environmental compliance costs, compliance
with state emission regulation and relative fuel prices will lead
to the retirement of the power plants. In 2011, total coal fired
power generation in the U.S. was 318 GW. The phased retirement of
27 GW over the next five years will therefore constitute 8% of the
total 2011 coal-fired capacity.
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 (MW) 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 GW 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
Duke Energy Corporation's
) subsidiary Progress Energy Carolinas has decided to move forward
the shutdown of its coal-fired generation units, which were
scheduled to be closed in 2013. The company will retire its 316 MW
Cape Fear coal-fired plant and the 177-MW H.B. Robinson Unit 1
coal-fired plant, on October 1, 2012. The retirement is a part of
the ongoing modernization process, and the closed coal-fired units
will be replaced by natural gas-fired units and oil-fired
The share of natural gas for power generation is projected to grow
from 24% in 2010 to 28% in 2035, as per the EIA's long-term
outlook. In a best-case scenario, this is expected to go up to 31%
in that time period.
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 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 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.
The share of renewable fuels (including conventional hydro) in
energy generation is projected to grow from 10% in 2010 to 16% in
2035, as per the EIA's long-term outlook.
Increasing Debt Levels:
One of the major concerns for the coal companies is the mounting
debt levels. The need for expansion, locating new fields and
upgrading the existing system are pushing the coal companies to
take more credit from the market by issuing bonds and securities.
However, in some cases, the extra funds which are put into
operation are not generating the desired results. Some of the coal
companies are on the brink of failure to service its debts. Patriot
Coal, for one, has filed for bankruptcy protection.
Spiraling debt and a failure to service these debts on time lower
the credit worthiness and credit rating of a company. In such a
scenario it gets increasingly difficult for the company to collect
funds from the market. And the conditions, if funds are at all
granted, get much stricter and less favorable.
Earnings Trends and Zacks Rank
The companies in the coal industry have started to report their
second quarter earnings results. The initial earnings trends are
promising, with Alliance Resource Partners, L.P.,
Alliance Holdings GP, L.P.
), Arch Coal, Inc. and Peabody Energy Corporation surpassing the
Zacks Consensus estimates.
While CONSOL Energy Inc.,
Cloud Peak Energy Inc.
Penn Virginia Resource Partners L.P.
) fell short of our expectations,
SunCoke Energy Inc.
) matched our expectation.
Our proprietary Zacks Ranks indicate the movement of the stocks
over the short term (1 to 3 months), which is a reliable indicator
of the likely movements of these coal stocks.
Over the short term we have only one name in our Zacks #2 Rank
(short-term Buy rating) radar, which is Alliance Holdings GP, L.P.
The majority of stocks we cover in the utility industry, such as
Alliance Resource Partners, L.P.,
Alpha Natural Resources Inc.
), Arch Coal, Inc., Cloud Peak Energy Inc., CONSOL Energy Inc.,
Hallador Energy Company
James River Coal Company
Natural Resource Partners L.P
), SunCoke Energy Inc., and
Walter Energy Inc.
), presently retain a Zacks #3 Rank (short-term Hold rating).
We presently have only one name in our Zacks # 4 Rank (short-term
Sell rating) radar, which is
Rhino Resource Partners LP
). The few Zacks #5 Ranked stocks (short-term Strong Sell rating)
are Peabody Energy Corporation, Penn Virginia Resource Partners
Yanzhou Coal Mining Company Limited
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
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 ("MATS"). All
coal fired units in the U.S. having a generation capacity of more
than 25 MW will have to abide by the MATS rule beginning 2015.
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 continue to
drive the coal industry in the future.
ARCH COAL INC (ACI): Free Stock Analysis Report
AMER ELEC PWR (AEP): Free Stock Analysis Report
ALLIANCE RES (ARLP): Free Stock Analysis Report
PEABODY ENERGY (BTU): Free Stock Analysis
CONSOL ENERGY (CNX): Free Stock Analysis Report
EXELON CORP (EXC): Free Stock Analysis Report
FIRSTENERGY CP (FE): Free Stock Analysis Report
ARCELOR MITTAL (MT): Free Stock Analysis Report
NATURAL RSRC LP (NRP): Free Stock Analysis
PENN VA RESRC (PVR): Free Stock Analysis Report
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