They see the recent proliferation of natural gas and decline of domestic coal consumption as signs that King Coal is falling from its perch.
And admittedly, they have a strong argument.
Coal stockpiles are now at record highs. Domestic prices have fallen. Mines have closed and power plants have made the switch to natural gas.
Throw in the fact that the EPA has handed down new emissions regulations for new coal-fired power plants (a cap of 1,000 lbs. of carbon dioxide per megawatt of electricity produced) and it’s not hard to see why the industry as a whole is struggling.
This is reflected in a number of coal companies along with the Market Vectors-Coal ETF recently hitting new 52-week lows.
So according to many in the media, coal is dead and investors should run for the hills.
But don’t look in the obituaries just yet.
I ask you – when has anyone ever made any real money listening to the “experts” on TV and in print?
My point is, if you were to read closer between the lines, you’ll see that the media couldn’t be more wrong on where the industry is headed. In fact, I believe investors should approach coal with (growing) optimism, as a rebound seems likely in the cards.
The Case For Coal
Before we move any further, let me clear the air on domestic coal consumption first.
The perception that new emissions regulations being handed down by the Environmental Protection Agency will be the final nail in the coffin for coal has been largely over exaggerated.
For years, the industry has been facing mounting pressure to clean up their production processes. Now new technologies such as carbon capture and mercury and acid gas-control equipment are being adopted by many of the major coal players.
Some of coal’s top brass have stated, most of their assets are prepared to undertake the upgrades, and they welcome the new changes.
Jack Fusco, CEO and President of Calpine Corp. which operates 92 plants in 20 states commented: “A recent report from M.J. Bradley and Associates and the Analysis Group shows that 11 of the top 15 largest coal fleet owners in the U.S., representing half of the nation’s coal capacity, have indicated that they are well-positioned to comply with the rules.”
Ralph Izzo, CEO and President of New Jersey’s largest utility company, Public Service Enterprise Group, also feels that such changes are necessary and will help to create jobs and modernize America’s electric power infrastructure.
Yes, natural gas has taken a huge bite out of the coal sector. Yes, new regulations have forced power companies to make changes.
But coal as a domestic fuel source isn’t going anywhere.
And on an international level, it’s just starting to heat up.
According to the IEA, global demand for coal will continue to expand aggressively through 2017.
And according to Milton Catelin, chief executive of the World Coal Association in London, coal use is expected to increase 50 percent by 2035.
“Last year, coal represented 30 percent of world energy, and that’s the highest share it has had since 1969,” he said.
Within a year or two, coal will surpass oil as the planet’s primary fuel, Mr. Catelin predicted.
Coal consumption is soaring around the world as global population grows and more electricity is needed – Europe and Asia in particular.
In countries like India, demand is expected to rise over 40% in the next five years.
Last year alone, China imported over 182 million tons of coal – 10% higher than 2010 and edging Japan as the world’s top coal importer.
Japan, once the world’s number one from 1975 to 2010, was no slouch either, clearing 175 million tons in 2011.
This is why American coal exports have flourished in the past few years.
We shipped approximately 107.3 million tons abroad in 2011, which is a whopping 31.3% increase from 2010.
According to analysts at Raymond James, coal exports in April touched a record 12.5 million tons and are on pace for 150 million this year. That’s an additional 40 percent jump from 2011, the most since 1991, according to Energy Department data.
Just five years ago, only 50 million tons were exported overseas.
Coping With Explosive Demand
The only thing holding back American coal exports is port capacity.
So to meet this unprecedented growth, a number of new coal ports have been proposed in Washington State and Oregon.
Among their backers are Warren Buffett’s Berkshire Hathaway and Goldman Sachs.
If all the ports were built, analysts estimate that the coal miners could sell 146 million tons worth at least $1.3 billion annually to the Chinese.
So much for telling King Coal to relinquish its crown.
Clearly, it’s time to take advantage of coal stocks while it’s out of favor with everybody else.
The time to buy domestic coal is now – while prices are dirt-cheap.
In the long run, I believe there’s nowhere to go but up.
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