China Coal Investing

Jeff Siegel

Written By Jeff Siegel

Posted April 29, 2013

Coal is not dead. It’s just relocating.

With new U.S. export facilities under construction and rail lines gearing up to triple coal runs to the West Coast, this is pretty much how I saw the future of U.S. coal unfolding.

In fact, last year I told you how there were 1,200 new coal-fired power plants in pre-construction phases in 59 different countries, with China and India leading the way…

I also noted an Energy Information Administration projection that showed the United States is on track to ship a record amount of coal overseas.

Now all of this is true. And certainly, over the next few years, U.S. coal suppliers will continue to generate significant revenue through exports.

But this big coal export boom may end up petering out a lot faster than expected.

Coal Rush

A couple of months ago, I was intrigued by a new study published by the analytics firm IHS. The report was called Coal Rush: The Future of China’s Coal Market, and it detailed with very convincing data how raw coal demand from China will likely peak in 2025 at around 5.1 billion metric tons.

To put that into perspective, over the past ten years coal demand in China maintained a growth rate of about 10%. But based on that 5.1 billion metric tons figure, this slashes demand growth to about 2.4%.

In the meantime — and likely to the dismay of those counting on explosive exports — China’s productive capacity for coal has not only increased by nearly four times, but is expected to continue this upward trend over the next few years.

IHS also notes that changes in transportation infrastructure disrupts the import/export paradigm even further, writing:

… transportation bottlenecks between domestic coal fields and demand centers emerged as a result of the rapid rise in coastal consumption, adding costs to delivered prices along the coast that helped make imports more competitive. IHS expects 800 million metric tons of new coal-carrying railway capacity to come online in the next five years, releasing currently “stranded” productive capacity to the market.

Based on IHS projections, import volumes will decrease rapidly from 2015 to 2020, due primarily to the combination of supply growth, demand moderation, and improved transportation.

The Final Nail

As if all this weren’t enough, there’s one more factor that could completely change the entire landscape of power production in China, thereby further decimating coal demand. You know it as fracking.

And according to IHS, China’s own shale gas revolution is expected to begin in less than ten years. If China gets even close to the kind of success we’ve had here, U.S. coal exports could go gently into that good night. And make no mistake about it; billions are being wagered on China’s fracking future…

Just last month Shell (NYSE: RDS-A) announced it will invest more than $1 billion a year to develop China’s shale gas deposits. That ain’t chump change, my friend. And Shell is just one producer with skin in the game.

In the meantime, while I wouldn’t count domestic coal out in the near term, it’s always good to prepare for the inevitable.

Of course, anything can happen over the next few years. I’m not saying coal will ever reclaim its throne, but to deny that coal doesn’t have a place in our power production mix would be short-sighted — even from an environmental point of view…

Truth is, there are now a number of very influential environmentalists that have recently changed their tunes on domestic coal-fired power generation.  This is due to the fact that exporting it to China, where it’s burned inefficiently (compared to power plants here), is actually worse for the environment than just keeping it within U.S. borders and burning it in regions where renewables aren’t particularly cost-effective, like in the deep South.

Run your utility-scale solar in the West, coal in the deep South, wind in the Midwest, throw in some decentralized power and microgrids for good measure, and run natural gas all over the lower 48 and Alaska… and you have an acceptable portfolio of generation that does help decrease carbon emissions while strengthening our overall energy mix with plenty of much-need diversification — a win-win for consumers, national security, environmentalists, and of course, investors.

To a new way of life and a new generation of wealth…

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Jeff Siegel

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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.

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