Why Coal Isn't Dead
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When election results came in earlier this month, it was as if coal investors threw up their hands and said, “Well, I guess coal is dead now.” As if Barack Obama has some vindictive disposition toward coal. As if the U.S. is the only country in the world that uses coal energy. As if the entire future of energy came down to one countries presidential election.
Yeah, I don’t think so.
U.S. Coal Companies Will Get Help Cleaning Up Their Act
Indeed, if Governor Romney won the election, the future of coal may be a bit brighter. However, Barack Obama is not out to get coal companies. Quite the opposite, he wants to help them produce a better product.
Last March, the President released a “Blueprint for a Secure Energy Future,” in which he outlines a plan to source 80% of our electricity from clean energy sources by 2035. Sure enough, “clean coal” was listed as one of those “clean energy sources.”
There will be more regulation of the coal industry, but the Obama administration will help balance those costs through subsidies. The Recovery Act has already invested $3.4 billion in carbon capture and storage technologies. Additionally, the administration has put together a task force to develop a 10-year clean coal strategic plan.
Moreover, investors should not forget that there are other forces at play aside from President Obama’s clean energy policies. The price of natural gas in the U.S. sank to an all-time low earlier this year due to a surplus of supply. As natural gas prices come back into equilibrium, and continue to climb, the demand for cheap coal will rise as well.
The U.S. is Not the Center of The Universe
Let’s not forget, the United States is not the only country in the world. Europe has seen a turn toward coal recently as prices for natural gas continue to rise in the region. China uses coal to supply over 70% of the country’s electricity. India uses it for 55%. Even while the U.S. is trying to lower its dependence on dirty energy, the coal market around the world is growing.
Peabody Energy agreed to terms with Kinder Morgan Energy Partners (NYSE: KMP) earlier this year to expand its gulf coast export program. The additional access will allow Peabody to export five to seven million more tons of coal per year from 2014 through 2020. The agreement coupled with the company’s operations in Australia puts Peabody in a great position to serve the growing global market.
Arch Coal made a similar agreement with Kinder Morgan to ship at least 10 million tons out of the gulf coast. The company also made moves early this year to open up new shipping terminals on the West coast. First, it acquired a 38 percent interest in Millennium Bulk Terminals-Longview in Longview, Washington. Second, it signed an agreement with Canadian Crown Corp to ship from Ridley Island, British Columbia. These west coast deals allow the company to ship to the growing Asian market more quickly.
Don’t Feed the Bears
I believe the bearish sentiment around the coal industry is largely unfounded. Global demand for coal continues to rise at a rate of 4%-5% per year. This is led in a large part by China and to some extent India, while developing countries attempt to move toward cleaner energy. Nonetheless, it appears as though the Obama administration would rather see clean coal than no coal, and is willing to help U.S. coal companies with subsidies. With the recent downturn for coal companies, I think now is a good time for long-term investors to get in.
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