Coal Investing

In 2004, coal was a major part of U.S. electricity generation, accounting for 51% of all generated power. The U.S. was one of the largest producers of the resource, second only to China, and though it was a top ten coal exporter, six other nations preceded it. Between 2005 and 2010, only 5% of domestically produced coal was exported.

But in 2011, coal-generated electricity dropped to 42%. The U.S. became the fourth-largest coal exporter, doubling exports from 5% to 10% of domestically produced coal.

The thing is, the U.S. has a lot of coal. But environmental concerns over the carbon emissions that come from burning fossil fuels like coal have sparked rounds of regulations and restrictions.

In March 2012, an Environmental Protection Agency (EPA) ruling put a limit of 1,000 pounds of CO2 per megawatt-hour on output-based emissions, requiring coal-fired plants to add enough carbon-capture and sequestration technologies to reduce their emissions output by 50%.

And though around 70% of U.S. coal plants are more than thirty years old, new ones aren't being built. With ever-tightening regulations in place, it just isn't feasible.

Last year, another competitor factored in. Natural gas prices fell below $2 per mmBtu for the first time in ten years.

Unlike the use of coal, the use of natural gas has been lauded, particularly when it comes to emissions reduction. By the end of 2012, U.S. carbon dioxide emissions fell 13% from their high of 6 billion metric tons in 2007, now at 1994 levels and moving ever closer to the 1990 level of 5 billion metric tons — a drop that has been attributed, in large part, to a switch by utilities and power companies from coal to the much cheaper, much less regulated natural gas.

Coal consumption has taken a hit, and with increased regulations and alternative power sources taking its place, it seems U.S. coal is headed out.

But don't give up on the sector too soon, because there are plenty of reasons for it to keep on going...

We Want Coal!

Just because coal demand is beginning to wane in the United States (and I said beginning – it still accounts for almost half of electricity generation) doesn't mean that the rest of the world has decided to reduce consumption.

First of all, natural gas may be cheap right now in the United States, but that doesn't say anything for other nations. Natural gas prices are as much as three times higher than U.S. prices in some parts of the world, so in those countries it's not displacing cheaper coal.

Second of all, developing nations have a growing electricity demand. Nations like China, the world's largest importer of coal, and India, the world's fourth-largest, have populations much more massive than the U.S. and require higher volumes of resources to even brush close to demand levels.

In 2011, the U.S. didn't even make the top ten for highest percentage of electricity generated from coal. South Africa had the highest percentage with 93%; Poland followed with 90%. China received 79% of its electricity from coal and India, which has been facing massive power outages and is still unable to provide power to all of its citizens, used the resource for 69% of its power.

It's likely that nations like India will increase their coal consumption in years to come; after all, Indian citizens are demanding power the utilities can't provide.

The U.S. and China are still the world's biggest producers of the resource, with China taking the lead. Other major producers are India, Australia, Indonesia, Russia, South Africa, Germany, Poland, and Kazakhstan.

But China burns much more coal than the U.S., so it's also the biggest importer. The U.S., on the other hand, sends this production back out in exports.

Even if domestic demand is waning, exports are rising. After a decade steady at 5%, exports jumped to 10%.

Though the domestic coal market is not what it once was, the U.S. still has plenty of the resource, and there's always somewhere for it to go.

Where to Profit

Many domestic coal companies are involved in supplying the product for these rising exports. Some of the biggest even have headquarters in other nations, dealing on five or six continents.

Peabody Energy Corporation (NYSE: BTU)

Peabody is the largest coal company in the world, serving 25 nations and boasting over 9 billion tons of proven and probable reserves.

Headquartered in St. Louis, Missouri, the company also has offices in China, Australia, the UK, Singapore, Indonesia, and Germany.

It has mining interests at 29 locations in the U.S. and Australia, and it has direct access to Asian and European markets with its international trading headquarters.

Last year, the company shipped a record volume of exports, bringing revenue to a new high at $8.08 billion.

Shares lost 31% over the first six months of 2012, when natural gas prices hit their cheapest. In the three months following, however, they jumped back up 19%.

Shares fell 18% in the first two months of 2013.

Arch Coal (NYSE: ACI)

Arch Coal is one of the five largest coal producers in the world. The company has mines in Wyoming, Utah, Colorado, Illinois, West Virginia, Kentucky, Virginia, and Maryland, accounting for 15% of the nation's total coal production.

Arch Coal's business is focused on providing low-sulfur and cleaner-burning coal. Also headquartered in St. Louis, Missouri, the company has customers on five continents.

The company's shares lost 53% over the first ten months of 2012, but between July and October, shares picked back up again, gaining as much as 31%.

Arch Coal received the Conservation Legacy Award from the National Museum of Forest Service History in September for “outstanding actions” in restoring operating locations.

CONSOL Energy Inc. (NYSE: CNX)

CONSOL is a unique company in that it is involved in the production of both coal and natural gas—energy sources that, when combined, account for two-thirds of U.S. power generation.

This strategy has helped the company to stay in the energy game even when natural gas prices dipped to become more attractive than coal.

The company is headquartered in Canonsburg, Pennsylvania, and it's one of the nation's biggest coal producers and the largest producer of underground mines, with 96% of its production coming from underground. Its longwall mining technology helps improve production.

CONSOL has 4.5 billion tons of proven and probable reserves, with 18 mining complexes in Kentucky, Ohio, Pennsylvania, Utah, Virginia, and West Virginia. The company's coal production powers 6.5% of the nation's total demand.

The company's shares lost 22% in the first six months of last, climbing back up 15% in the following three months.

Coal Outlook

The future of coal in the United States is not doomed simply because demand has been decreasing. Though coal prices averaged $2.40 per mmBtu in 2012, higher than natural gas's low of around $1.80 in April, the EIA estimates that they will only rise to an average of $2.42 per mmBtu this year.

Natural gas prices, on the other hand, have not stayed at these ten-year lows they hit last spring. Prices were back up to around $2.40 per mmBtu by May, and in March 2013, they were circling $3.50.

The prices, as with most things, are dependent on demand. Winter 2011-2012 was unusually mild, followed by one of the hottest summers in recorded history, so the drop in demand, coupled with a rise in production, contributed to the dip in prices.

But once natural gas prices get even more expensive, coal will start to look attractive again. Even if coal's percentage of power generation doesn't hit levels it once touched, coal-fired plants will start up again.

Exports could taper off slightly this year, the EIA said, if international coal prices fall and demand from China slows, which is likely to happen as a result of slowed growth.

U.S. coal is also dependent on the party in the White House, as was evident from stock trends during the 2012 presidential election.

Following the first presidential debate during the election, when Mitt Romney voiced his support for coal, coal stocks shot up. Arch Coal received a boost of 6.7%, CONSOL Energy jumped 4.9%, Alpha Natural Resources (NYSE: ANR) went up 5.2%, and Peabody Energy moved up 4.2%.

Stocks were also up after the second debate, where Romney again put coal in a positive light. Peabody shares were up 3.63% by the day's close, Arch Coal was up 4.5%, Alpha Natural Resources jumped 8.3%, and CONSOL closed up 2.99%.

But investors seem to be wary of President Obama's plans for coal. His crackdown in regulations on the coal industry made the construction of new coal plants extremely difficult. And he may push to further these strict regulations in his second term.

The future of domestic coal lies in the hands of the domestic energy plan. Regulations will play a big role in restricting the domestic use, though international growth could spur domestic production and exports.

Investors should watch the progression of policies here in the U.S. and abroad, as well as coal and natural gas prices, to stay informed on the future of coal.

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