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 coal use.
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 expeditions.
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 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, though the emergence of large shale
natural gas reserves is expected to pose tough competition going
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
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
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 automobiles.
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
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
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
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 sector.
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
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 (Sell).
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.
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 upcoming quarters.
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 internationally.
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
AMER ELEC PWR (AEP): Free Stock Analysis
ALLIANCE RES (ARLP): Free Stock Analysis
PEABODY ENERGY (BTU): Free Stock Analysis
CONSOL ENERGY (CNX): Free Stock Analysis
EXELON CORP (EXC): Free Stock Analysis Report
FIRSTENERGY CP (FE): Free Stock Analysis
ARCELOR MITTAL (MT): Free Stock Analysis
NATURAL RSRC LP (NRP): Free Stock Analysis
PVR PARTNERS LP (PVR): Free Stock Analysis
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