Since Obama said he would put coal companies out of business, Wall Street has ignored coal producing, making it the most undervalued sector in the market.
It’s true, coal production did go down for four years, but since Trump was put in office, that has turned around. Don’t get me wrong; the U.S. isn’t burning more coal — it’s exporting it, both to China to replace low-quality coal and to Germany, which shut down its nuclear power plants.
We Have Lots of Coal
There will soon be more than 8 billion people on this planet, and they all want electricity. The lowest-cost producer of power is coal, and we have lots of it.
One professional organization estimates that there are 1,004 billion tonnes of coal reserves left, equivalent to 130 years of global coal output. The U.S. has been called the “Saudi Arabia of Coal” and has enough to last 500 years.
Coal in Electricity Generation
Coal is the major fuel used for generating electricity worldwide. As you can see, South Africa is most dependent on coal to keep the lights on.
Coal is cheap and plentiful. Coal plants are also low-cost and easy to build. Therefore, consumption growth is driven by the low cost of building and running coal-fired power plants and the strong demand from emerging market countries like China and India for electricity. Their growing infrastructures and populations demand electricity.
There are 1.3 billion people currently without electric power in the world, and they want refrigerators and TVs just like everyone else.
There is a true growth trend in coal right now. It is one of the most undervalued commodities in the world. But it won’t be that way for long. There is a very solid case to be made that coal will be one of the best-performing assets over the next 10 years.
Know Your Types: Thermal and Metallurgical
Coal formation began during the Carboniferous Period, known as the first coal age, which spanned 360 million to 290 million years ago. The build-up of silt and other sediments, together with movements in the Earth’s crust, buried swamps and peat bogs under the earth. With burial, the plant material was subjected to high temperatures and pressures. This caused physical and chemical changes in the vegetation, transforming it into peat and then into coal.
Dry, hard coal is worth more than wetter, less dense coal because it burns hotter and cleaner.
The type of coal is determined by:
- What kind of vegetation it is sourced from
- How deep it is buried
- The temperature and pressure at that depth
- How long it is buried
The degree of change undergone by coal as it matures from peat to anthracite is known as coalification. Coalification has an important bearing on coal’s physical and chemical properties and is referred to as the “rank” of the coal.
Ranking is determined by the degree of transformation of the original plant material to carbon. The ranks of coals, from those with the least carbon to those with the most carbon, are lignite, sub-bituminous, bituminous, and anthracite.
Types of Coal
Initially, the peat is converted into lignite, otherwise known as “brown coal” or soft coal. This is the type most common in China.
Over many more millions of years, the continuing effects of temperature and pressure produce further changes in the lignite, progressively increasing its organic maturity and transforming it into the range known as sub-bituminous coals.
Further chemical and physical changes occur until these coals became harder and blacker, forming the bituminous or “hard coals.” Under the right conditions, the progressive increase in the organic maturity can continue, finally forming anthracite — the most valuable type of coal, used in the production of iron. This type of coal is abundant in the United States.
In addition to carbon, coals contain hydrogen, oxygen, nitrogen, and varying amounts of sulfur. High-rank coals are high in carbon and therefore heat value, but low in hydrogen and oxygen. Low-rank coals are low in carbon but high in hydrogen and oxygen content.
Thus, coal is divided into two basic types:
Thermal coal is used for electricity.
Metallurgical or coking coal is used for making steel.
When investing in coal, the quality of the coal is more important than the quantity.
Since 1983, China has been the world’s top producer of coal. But that doesn’t mean it has the most — just that it has the highest demand. Production has less to do with reserves that it does with demand.
The U.S. has by far the world’s largest reserves of coal. Some estimate that the United States has enough coal to last 500 years.
For example, Indonesia, Australia, and the U.S. export to Asia; South Africa and Kazakhstan to India; and Russia to Germany, China, and Japan. Since coal production is low cost and low tech, any country with a rail line, a port, and an abundance of coal can be a major exporter. Digging coal out of a pit mine is nothing like drilling two miles down in the North Sea. If coal spills, you pick it up. There are no blowout wells.
As opposed to other energy sources, there is an almost endless supply of coal. No one talks of “peak coal.” Therefore, coal isn’t affected by a new finds, dwindling supply, or politics in the Middle East. In this way, it is the most honest of energy commodities.
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The top importers of coal are:
|% Total Imported Coal
Pollution Drives Switch to Hard Coal
Coal mining exacts a tremendous toll on the environment to the point of destroying mountain ranges and polluting waterways. Black lung is a killer for miners. Underground seams of coal have been known to catch fire and burn for years.
There are thousands underground seam fires around the world. The most publicized is perhaps the one that is still burning underneath the now-empty town of Centralia, Pennsylvania. One in India has been burning since 1916.
But the real problem is the waste products that are produced after it is burned.
Coal plants produce the largest amount of carbon dioxide (CO2) emissions in the world. Scientists believe CO2 is the primary cause of global warming or climate change. In 2011, utility coal plants in the United States emitted a total of 1.7 billion tons of CO2. All by itself, a 1970-era coal plant generates 3.5 million tons of CO2 per year.
Burning coal, especially brown coal, is a leading cause of smog, acid rain, and toxic air pollution. China has an epic problem with air pollution. Recent air pollution was so bad that it was reported as “beyond index” according to the U.S. Embassy’s American Air Quality Index.
As someone who has not only traveled to China but also suffered traveling in India under the great Asian Brown Cloud, I can tell you air quality is a very real problem.
These emissions can be fixed with scrubbers and other technologies, but these are expensive and inefficient.
But that’s not all. A typical coal plant produces 114 pounds of lead and 4 pounds of cadmium, as well as other toxic heavy metals. It will also spew forth 720 tons of carbon monoxide, 220 tons of hydrocarbons, and 225 pounds of arsenic.
According to the IEA, there are over 2,300 coal-fired power stations in the world.
China Goes Green
From a climate perspective, the ideal scenario would be for China to shut down all of its coal-fired power plants and switch over to clean energy. But that can’t happen — China’s energy economy is a massive ship that cannot turn on a dime.
China is going green, however, just not the way you think. China signed the Paris Agreement, which includes a promise to install 800 gigawatts to 1,000 gigawatts of new renewable capacity by 2030, an amount equivalent to the capacity of the entire U.S. electricity system.
China and the United States have roughly the same land mass; however, China has 1.3 billion people to the United States’ 325 million. It needs an electricity system that is much larger, so adding the renewable equivalent of one entire U.S. electricity system is not enough to replace coal in the near to medium term.
To bridge the gap, China is rolling out new technologies to drastically reduce local air pollution and climate emissions from the nation’s remaining coal plants.
China’s new coal-fired power plants are newer and cleaner than anything operating in the United States.
China’s emissions standards for conventional air pollutants from coal-fired power plants are stricter than the comparable U.S. standards.
China is switching from brown coal to hard coal.
Not all coal-fired power is created equal. Emissions and efficiency vary dramatically based on the type of coal and coal-burning technology used. China has been steadily shutting down the nation’s older, low-efficiency, and high-emissions plants to replace them with new, lower-emitting coal plants that are more efficient that anything operating in the United States.
But they need the higher-quality coal. To get it, they import from the U.S. and Australia.
So, while Wall Street thinks coal is dead, coal prices and exports have been trending upwards. One U.S.-based coal company I’ve discovered grew earnings 37% last quarter and is paying a 10.61% dividend. And it has a price-to-earnings of 6.85! That’s crazy undervalued.
All the best,