2013 Coal Forecast

The Long and Short of Coal's Success

By
Tuesday, October 16th, 2012

Admittedly, there haven't been too many reasons for us to get excited over coal during the last several years — not here in the United States, anyway.

Coal carries with it a stigma the industry is desperately trying to shake.

And it's this dirty reputation that has put coal at a huge disadvantage in the U.S...

(I've never been a fan of the clean coal myth.)

But 90% of our coal consumption — approximately 900 million short tons every year — goes toward electrical power, feeding over 1,400 generators across the country.

Coal also happens to be our largest source for electricity:

coal electricity generation

Coal's share in our electrical generation has been slowly falling over the last ten years — and according to the EIA, natural gas has been gaining traction for nearly a decade.

Not only is our gas production at record levels, but the U.S. is building the infrastructure to match it.

In the last 20 years, nearly all of the new electric generators built in the U.S. are geared toward natural gas:

generators 10-12

Just last week, the proposal for the first new power plant fueled exclusively by Marcellus Shale gas was approved. The plant is slated for construction in Pennsylvania.

To put that into decision into perspective, remember that nearly 60% of Pennsylvania's power in 2000 came directly from coal...

That amount dropped to less than half just ten years later.

These upcoming power plants are in addition to the growing number of pipeline projects that will keep Marcellus production flowing.

With our energy picture quickly shifting away from coal, why then are we expecting a boost in demand in 2013?

2013 Coal Outlook

Here's the rub: The huge gains made by natural gas companies are also their Achilles' heel.

I pointed out last week in my 2013 natural gas forecast that record production levels have directly caused prices to collapse since 2008 as well as a severe slowdown in drilling activity...

Factor in producers starting to shut-in their natural gas wells, and we are unquestionably led to higher prices next year.

This in turn means coal will become more cost-competitive with natural gas.

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In the first chart, notice how coal regains some lost ground in 2013. Granted, this is far from a lasting victory for coal, because those gas producers can simply turn the taps back, on should prices rise too much.

In other words, more expensive natural gas (compared to today's ultra-low prices) is on the way, but we aren't expecting a price spike to occur.

Coal producers have one last ace in the hole to fuel their long-term success...

It's true we may be phasing out domestic usage of coal during the next several decades. We certainly aren't expecting the U.S. (or any of the OECD countries, for that matter) to drive demand in the long term.

But very real growth will is still taking place in other parts of the globe.

This much has been obvious since the 1980s:

china coal demand

China accounted for about 46% of the world's coal production last year, while Chinese imports increased 20% to roughly 223 million tonnes — a 78% year-over-year increase. By 2016, Chinese imports are projected to reach as high as 450 million tonnes.

Right next door, India's coal consumption is rapidly climbing — and at a stronger pace than China's:

china-india-10-12

As my colleague Jeff Siegel put it recently, “King Coal is heading East."

Unlike natural gas, coal producers have the ability to export their product overseas.

More of our coal was shipped to Europe than Asia in 2011, and any further supply disruptions in major Asian exporters like Australia and Indonesia will be turned into an advantage by U.S. coal producers.

The critical point for individual investors like us is to find the stable and secure players in the coal sector — companies like Peabody Energy that will have a bright, long-lasting position in the global coal trade.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.


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