Indian companies are looking for new sources of coal.
Tata Power Co. is India’s second largest power generation and supply company, and some of the company's recent purchases have not worked out as it had hoped.
The company bought mines in Indonesia right before the country changed its coal pricing strategy. At the time these deals were signed, Tata was expecting a coal price in the range of $42. But this has risen exponentially, forcing Tata and other Indian companies to search for additional options.
Regional coal suppliers are also dealing with the same price increases, so Tata is searching for foreign import solutions. Initially, the company had been eyeing South Africa, but it is now apparent that the country has some serious infrastructure issues.
This has led India to look towards the U.S. as a potential source of imported coal to fuel its energy needs.
The Indian Energy Scene
India is already the third largest coal consumer in the world, and now it is experiencing a coal shortage. Regional supplies are not really good options, since they are more expensive and in rather short supply.
In fact, India and China are already huge coal importers; experts have estimated that these two countries are responsible for 95 percent of the growth in global demand over the last decade.
To make matters worse, Tata owns stakes in a number of other domestic and regional power generation companies. And government regulations are hurting the ability of Indian companies to supply enough power to the market.
As a result, last year over 640 million people in India were without power, and experts predict that this record blackout could happen again this year if the country does not figure out a solution to its energy problems.
Indian coal imports are already beginning to rise. For the month of March, total Indian coal imports have risen to 11.8 million tons, ahead of the figures reported for last year (11.6 million tons).
Indian officials are now also indicating that the country may import an additional 30 to 32 million tons for the coming year. These projections are due to the continued rising costs of coal, capital, and the difficulty in getting new mines approved by regulators.
Help From The U.S.
Recently, the United States has seen a drop in the domestic demand for coal. Fracking has made it possible to access natural gas and oil reserves hidden deep inside shale rock formations, and natural gas has slowly begun to replace coal in power generation.
The situation in the U.S. coal industry has completely turned around in recent years. In the past, approximately half of all domestic electricity generation came from coal and only 5 percent of coal was exported.
But in 2011 exports doubled, and the amount of electricity generated from coal has now dropped significantly. The U.S. is now the fourth largest coal exporter, supplying countries such as China and India.
Because of the fracking boom, the price of natural gas has declined, so it only makes sense to focus more on the cheap gas supplies and less on coal.
Additionally, there are a number of environmental concerns about burning coal to generate electricity. The U.S. government is continuing to impose tougher new regulations on the burning of coal and fossil fuels. Despite the fact that almost 70 percent of coal plants across the country are aging and in need of serious repair, new facilities are not being built.
The bottom line is that the United States has a lot of coal. Reserves are actually growing with all of these changes. Exporting to India seems to be the perfect solution for both countries: India gets a reliable supply that is accessible and reliable without having to worry about regulatory and political concerns, and the U.S. gets a valuable market.
There are a number of U.S. companies involved in coal production and exporting. If the demand for U.S. coal continues to rise and domestic regulations, politics, and environmental concerns continue to make the use of coal unattractive within the country, some of the biggest players could profit.
Peabody Energy Corporation (NYSE: BTU) is the world’s largest coal company. It would be well positioned to profit from any surge in U.S. exports and rising demand throughout the world, particularly India and China.
Consol Energy (NYSE: CNX) is one of the largest U.S. coal producers, supplying 6.5 percent of domestic demand. The unique feature here is that the company produces both coal and natural gas, so this might be a interesting way to play both increased U.S. coal exports as well as natural gas production, supply, and future exports.
Investors can also look to coal related ETFs. The Market Vectors Coal ETF (NYSE: KOL) tracks 35 different coal producers and is predominantly weighted towards the U.S.
An ETFs can be more diversified ways to profit from both the increased global demand and U.S. exports of coal.
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