U.S. Coal Producers Set Stage for Export-Driven Recovery
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The International Energy Agency released its annual Medium-Term Coal Market Report on Tuesday morning, and the publication reaffirms the view that coal demand is growing on a worldwide basis, despite declining consumption here in the United States. Specifically, the IEA expects coal usage to grow at nearly 5% per annum, with two-thirds of the increase coming from China. Coal consumption in the US is expected to decline by 2.5% annually, as a result of power plants switching to natural gas.
In recent years, a record number of coal-fired power plants have either closed or filed for bankruptcy, both due to the low price of natural gas and the increased cost of compliance with the federal government. Bankrupt Patriot Coal (NASDAQOTH: PCXCQ) is a fresh reminder of the difficult operating conditions facing the coal industry. The Environmental Protection Agency is unrelenting in its effort to shut down coal-fired plants, with its controversial Cross-State Air Pollution Rule receiving significant attention in recent months. Although the EPA suffered a loss in federal appeals court, under the Obama administration it is hard to be optimistic about the future of coal power generation.
"The Obama-EPA continues to demonstrate that it will stop at nothing in its determination to kill coal," said Republican Senator James Inhofe, on August 21 in Washington. "With so much economic pain in store, it is fortunate that EPA was sent back to the drawing board."
With the above backdrop in mind, it is important to emphasize the recovery I am proposing for U.S. coal producers is not based on domestic demand. Rather, the industry is evolving in order to stay alive based on the commercial and regulatory factors impacting the U.S. coal market.
Here are four reasons why U.S. coal makers are setting the stage for an export-driven recovery:
- European coal consumption is increasing. In contrast to the United States, our European counterparts are less concerned about the environment and more concerned with economics. Natural gas prices are approximately three times higher across the Atlantic, making coal-fired power generation the only economically viable solution.
- According to Wood Mackenzie, an energy research and consulting firm, China and India are collectively expected to import 825 million tons of coal by 2020. Based on continued urbanization, the total import amount is estimated to grow to 1.5 billion tons of coal by 2030. Despite their own ability for domestic production, China and India have a strong need to import coal, based on the reasons discussed in a separate article.
- More than two hundred U.S. port expansions are set to take place across the East Coast, West Coast, Gulf Coast, and Southeast. U.S. coal exports are expected to reach a projected capacity of 270 millions tons by 2017, based on planned expansions.
- The United States has a recent history of increasing coal exports. According to the National Mining Association, we exported 49 million tons of coal in 2006. Our coal exports more than doubled over the last five years, reaching a total 108 million tons exported during 2011.
Consol Energy (NYSE: CNX), a leading coal and gas producer headquartered in Pittsburgh, PA, serves as a great illustration of the need to diversify outside the United States. The company currently ships coal to four continents through its 100% company-owned terminal in Baltimore, Maryland. An expansion recently took place at the Baltimore terminal, which is now able to service a total capacity of 16 million tons per quarter, an increase from the 14 million tons serviced during third quarter 2012. Consol also has a presence in Asia through its marketing partner Xcoal.
Alpha Natural Resources (NYSE: ANR) has become a leading global supplier of coal through its 2011 acquisition of Massey Energy. The company has a growing international customer base on five continents. Through September 30, 2012, Alpha Natural has exported 16.2 million tons of coal, with its largest markets in Europe and Asia receiving 6.3 and 4.5 million tons respectively. Exports represent only 20% of Alpha Natural’s overall business, however, as the lion’s share of coal shipped remains in the U.S with 66.7 million tons through the third quarter. In contrast to Consol Energy, which has a healthy balance sheet, Alpha Natural is struggling to manage the incremental debt from the Massey acquisition.
For investors who prefer to diversify their coal exposure, the Market Vectors Coal ETF (NYSEMKT: KOL) includes a basket of holdings, including Consol Energy, Peabody Energy, Joy Global, as well as several Chinese coal miners. In particular, Peabody Energy is the world’s largest private sector coal company and offers the most international exposure.
Foolish Bottom Line
The picture will improve for U.S. coal producers as exports rise dramatically over the next decade, making up ground for tepid domestic demand as natural gas generation continues to fuel America’s power grid.
Although reports indicate that some power plants have switched back to coal from natural gas in recent months, investors should not read into this news, as it is simply based on favorable near-term economics. Our nation’s coal producers face an uphill battle within the United States, and their future business prospects lie mostly in exporting to the world’s growing economies.
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