Submitted by
Wall St.
Daily
using our
Trefis
Contributor Tool
Coal prices have been in a tailspin since the beginning of the
year. But now some industry players are calling for a rebound.
Don't buy into it.
It might seem like a good contrarian play at the moment (and in
the short term, maybe it is). But the long-term outlook is
exceedingly bleak.
Coal faces major headwinds, including increased competition,
tougher regulations and deteriorating plants. And these problems
aren't going away anytime soon
.
In other words, King Coal is dead - and it's not coming
back.
You see, coal essentially has two purposes: Thermal coal is
burned to create electricity and coking coal is used to make
steel.
The former is the big one. About 87% of the world's total hard
coal production is used for power.
Yet that's where coal faces its stiffest competition.
Coal's dirty and inefficient. So it's being supplanted by other
sources of energy - especially natural gas.
Natural gas has always been cleaner than coal, as it releases
half the carbon dioxide emissions when it's burned. But now it's
cheaper, too.
For that reason, power companies that once relied on coal are
making the switch to natural gas. And they increased their use of
the fuel by about one-third over the past year, according to Energy
Department data.
Take
Southern Co.
(
SO
), for example.
In 2008, coal made up 70% of Southern's electricity generation.
Now it's 32%. By 2020, the company expects to generate 57% of its
power from natural gas.
This shift is occurring industry wide.
Coal produced just 36% of U.S. electricity in the first quarter
of 2012 - down from 42% last year and 57% in 1985.
And power suppliers aren't just switching for the cost savings,
either. The truth is, most power plants were already transitioning
to cleaner natural gas to reduce carbon emissions and comply with
clean air laws. Lower prices just accelerated the change.
Since 2010, plant operators have announced 106 retirements of
coal facilities - representing 13% of the U.S. fleet. And newer,
tougher environmental regulations will ensure that no new plants
are built to replace them.
In fact, plans to build as many as 15 new coal plants could be
deterred by new carbon emissions standards, according to the
Environmental Protection Agency.
That's bad for coal, but good for the environment. With coal
being shunned, carbon dioxide emissions from the fossil fuel sector
are expected to decline 3% this year, compared to the 1.9% decrease
in 2011.
Ultimately, the United States will consume 876 million tons of
coal this year, according to the Energy Information Administration
(
EIA
). That's the lowest level since 1987. Yet the country will still
produce 982 million tons of coal, which will just add to the
current supply glut.
Still, many optimists believe that demand in emerging markets -
especially China - will offset this decline and eventually lead to
a resurgence in coal prices. But that's unlikely.
To begin with, China's economy isn't growing nearly as fast as
it once was. (That's dampened the demand for electricity and steel,
further exacerbating the decline in coal prices.)
And while China currently gets 80% of its power from coal, the
country is fast tracking its natural gas program to duplicate the
United States' success.
China is home to the world's largest deposits of shale gas. And
if it develops those assets, it has the chance to reduce pollution,
create jobs and become more energy independent…
That's why it set a goal of producing more than 60 billion cubic
meters of natural gas - about 10 times the current amount - by
2020. Recall, that's why so many Chinese energy companies have been
looking for overseas takeover targets.
Indeed, coal's days in China are numbered, just like they are in
the United States.
So do yourself a favor and avoid companies like
Peabody Energy
(
BTU
),
Alpha Natural Resources
(NYSE:
ANR
) and even
BHP Billiton
(
BHP
).
They have too much exposure to coal. And coal is the fuel of the
18
th
century, not the 21
st
.
