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.
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 Energy Information Administration (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
As per the World Coal Association, proven global coal reserves are
estimated to be 861 billion tons. This reserve is expected to last
nearly 112 years at the current rate of production. On the other
hand, proven oil and gas reserves are projected to last around 46
years and 54 years respectively at current production levels. We
believe the volume of reserves and availability of coal in most of
the countries across the globe make it a globally accepted source
of power generation. At present, around 40% of the global electric
generation plants are coal fired.
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 pose tough competition going forward.
Demand for power in the U.S. also rises during winters, driving a
concomitant demand for coal. So, we believe stockpiles of coal
accumulated earlier will be utilized over the next few months.
The recovery in the coal sector is also a reflection of a broader
recovery in the economy following a period of recession. As per a
media report, in May 2012, 85,600 people were employed in this
industry versus 77, 200 in December 2007. This implies an addition
of around 10,000 employees over the last five years.
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.
Admittedly, the dominance of coal as a source of electricity
generation has diminished with the availability of other fuel
sources. However, as per an EIA report, coal will continue to be
the major source of electricity generation in the U.S. 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 in 2011,
nuclear power's contribution to 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, hard coal (metallurgical or coking coal) forms a key
ingredient in the production of steel. Nearly 70% of global steel
production depends on coal.
Overall, steel demand in the developing and emerging world will
rise 3.0% in 2012 and 3.7% in 2013. This is surely an encouraging
sign for 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 of 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.
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
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.
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
2012. In 2011, United States exported most coal to the Netherlands,
approximately 10.7 million short tons.
Besides Australia, the U.S. coal exporters could face competition
from Russia. Russia has the second largest reserve of coal, next
only to U.S. Now if it starts to export coal in bulk to China and
India, it will have a geographical advantage over the U.S.
The 2012 coal volume output in the U.S. is expected be lower than
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 regulations 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.
Sluggish Economic Recovery:
The sluggish pace in economic recovery in 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 September
2012, 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 uneconomic, 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
This has led Peabody Energy to permanently shut down its Willow
Lake Mine near Harrisburg, Illinois. The Willow Lake Mine has
failed to meet acceptable standards for safety, compliance and
operating performance. This makes operation in the mine unsafe and
CONSOL Energy decided to idle its Miller Creek surface operations
near Naugatuck, West Virginia, citing a sequence of permit delays
that has prevented the company from securing all of the necessary
environmental permits required to continue mining.
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.
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 Review and Zacks Rank
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 224 out of 260 industries in
our expanded industry classification. This puts the industry in the
bottom third of all industries, which corresponds to a negative
outlook for the industry. None of the 18 companies in the Coal
industry has Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy),
while 6 have either Zacks Rank #5 (Strong Sell) or Zacks Rank #4
The earnings results of
Alliance Holdings GP, L.P.
Arch Coal, Inc.
Peabody Energy Corporation
Alpha Natural Resources Inc.
Cloud Peak Energy Inc.
Natural Resource Partners L.P.
SunCoke Energy Inc.
Rhino Resource Partners LP
) surpassed the Zacks Consensus Estimates. The highest positive
surprise of 35 cents came from Arch Coal with the lowest surprise
of 5 cents coming from Rhino Resources.
On the other hand results from
CONSOL Energy Inc.
Penn Virginia Resource Partners L.P.
Walter Energy Inc.
James River Coal Company
Alliance Resource Partners L.P.
) were lower than our projection.
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 movement of these coal stocks.
The majority of stocks we cover in the coal industry, such as
Alliance Holdings GP, L.P., Alpha Natural Resources Inc., Arch
Coal, Inc., Peabody Energy Corporation Cloud Peak Energy Inc.,
CONSOL Energy Inc.,
Hallador Energy Company
), Natural Resource Partners L.P., SunCoke Energy Inc., Rhino
Resource Partners LP and Penn Virginia Resource Partners L.P.
presently retain a Zacks #3 Rank (short-term Hold rating).
We presently have a couple of names in our Zacks #4 Rank
(short-term Sell rating) radar, which are CONSOL Energy Inc. and
James River Coal Company. We also have two short-term Zacks #5
Ranked stocks (Strong Sell rating) which are Walter Energy Inc. and
Yanzhou Coal Mining Company Limited
In hindsight, the third quarter earnings results of the coal sector
were more or less satisfactory. Hence we provide a Hold
recommendation for the majority of stocks in our coverage in this
sector. We expect the measures undertaken by the coal operators to
cope with the changing demand scenario will become apparent in the
Though there is ample pressure 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.
The coal block controversy in India might open up new export
opportunities for the coal operators in the U.S. Coal is a major
source of generation of power in India. India's emphasis on
infrastructure development will increase the demand for power. The
coal controversy far from dying down will in some way force the
Indian operators to source coal from outside. The U.S. coal
operators with different varieties of coal at their disposal are
going to be the top contenders to fill up the supply void.
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. The exporting of coal to Canada
is decreasing with each passing day, as the country has started to
lower its dependence on coal-fired units.
We believe cost of transportation plays an important role in this
sector. An EIA report says that in the U.S. on an average
transportation costs hike 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
Undaunted the coal operators are using new technology 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 environmental concerns.
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 of fuel generation are available, coal's
advantage lies in its price, which is far cheaper than other
sources of fuel. 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
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
PVR PARTNERS LP (PVR): Free Stock Analysis
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