Chicago, IL – March 17, 2015 – Today, Zacks Equity Research discusses the Coal (Part 2), including Westmoreland Coal Company (WLB-Free Report), FMC Corporation (FMC-Free Report), Walter Energy (WLT-Free Report), Alpha Natural Resources Inc. (ANR-Free Report) and Peabody Energy (BTU-Free Report).

Industry: Coal (Part 2)

Link: https://www.zacks.com/commentary/38523/4-things-to-know-about-the-coal-industry

4 Things to Know About the Coal Industry

the strict regulatory measures to control emissions will have an adverse impact on the unrestricted use of thermal coal for power production. Having said that, coal still holds an advantageous position due to its wide availability and lower cost compared to other fossil fuels and renewable sources of energy.

Per a report from World Coal Association, we currently have 861 billion tons of proven coal reserves worldwide. This means that there is enough coal to last nearly 112 years at current rates of production. In comparison to this, proven oil and gas reserves are equivalent to around 46 and 54 years, respectively, at current production levels. Proven reserves are considered economically recoverable at any given time, taking into account available mining technology and costs.

As we see from the above data, the current availability of coal even outpaces the combined proven reserves of oil and gas.

Per a U.S. Energy Information Administration (“EIA”) report, 2014 coal consumption in the U.S. for power generation remained unchanged from year-ago levels.

The U.S. Environmental Protection Agency (“EPA”) announced in Jan 2015 that it is presently taking a commonsense approach to cut carbon pollution from power plants. The EPA decided to delay the implementation of the final rule to control pollution from new coal-fired power plants til midsummer 2015.

The crucial question is what’s keeping the coal industry afloat amid rising competition from other fuel sources and a stringent regulatory climate. We have tried to address these factors below.

Coal Dominates U.S. Power Generation: Coal as a major source of generating fuel dominates the utility industry. Coal is used to generate near about 40% of the electricity consumed in the U.S. Electricity generation absorbs about 93% of the total U.S. coal consumption. The reason is simple: coal is by far the least expensive and most abundant fossil fuel in the country.

Not Just Electric Generation: Electricity generation is just one use of coal in the U.S. Manufacturing plants and industries use coal to make chemicals, cement, paper, ceramics and metal products, to name a few. Methanol and ethylene, which can be made from coal gas, are used to make products such as plastics, medicines, fertilizers and tar.

Certain industries consume large amounts of coal. For example, concrete and paper companies burn coal, and the steel industry uses coke and coal by-products to make steel for bridges, buildings and automobiles.

In Nov 2014, Westmoreland Coal Company (WLB-Free Report) signed a long-term coal supply agreement with a diversified chemical company FMC Corporation (FMC-Free Report). The new deal terminates two old contracts and extends the fresh one through 2026.

Cement, a major ingredient for the construction industry, also requires energy for its production. Coal here plays an important role in cement production.

Coal as an Input for Steel Industry: Due to its heat-producing feature, hard coal (metallurgical or coking coal) forms a key ingredient in the production of steel. Nearly 70% of global steel production depends on coal.

Per a release from the World Steel Association, the world crude steel production touched 1,662 million tons (Mt) in 2014, up 1.2% over the prior year. An earlier report from World Coal Association had estimated a 2% improvement in steel usage in 2015 from 2014 levels.

Since met coal is an essential ingredient for the production of steel, U.S. met coal producers like Walter Energy (WLT-Free Report) and Alpha Natural Resources Inc. (ANR-Free Report) could benefit from this revival.

Demand Upsurge in Asian Countries: The increase in coal demand in Asian economies like China and India has been a key price driver since the end of the recession in 2009. We expect this trend to continue in the future mainly due to rising energy needs in India, China and South Korea.

Of the Asian countries, economic growth in China and India will be the fastest. These two countries do produce coal, but their domestic coal production is yet to match the growing demand, resulting in a continuous need to import. These two countries rely heavily on coal for electricity generation.

Japan is also importing large volumes of coal following the deactivation of its nuclear power plants. Given the rising demand from the fast-growing Asian economies, companies will find it attractive to export coal to these regions.

Peabody Energy (BTU-Free Report) in a bid to access the Asian coal markets had acquired Macarthur Coal of Australia in 2011. To further strengthen its Australian footprint, the company has entered into a joint venture with the largest coal producer of Australia, Glencore Coal Pty Ltd. (Glencore), to develop mines in Hunter Valley. The objective is to further reduce the cost of production and increase the mining life of assets.

Peabody has also extended its operations to Thailand, which is marked by a two-fold benefit. Firstly, Thailand is the world’s largest supplier of sea-borne thermal coal. This Southeast Asian nation is also strategically located nearer the Asian demand centers.

To Sum Up

The black Diamond hasn’t seen its last days yet. For the aggressively growing and energy hungry Asian economies, coal seems to be the most popular source of power generation in spite of the inroads being made by renewables.

Peabody Energy expects annual global coal demand to rise by 500 million tons by 2017. The company further adds that over this period, nearly 225 gigawatts of new coal-fired generation plants are expected to be built, supporting an estimated 8% to 10% increase in seaborne thermal coal demand.

A large section of the population in the developing nations of Asia and Africa are yet to have access to electricity. For most of these developing nations, thermal coal is the preferred choice of electricity generation. A disparity between demand and supply in these growing economies will compel them to import coal from abroad. U.S. coal shipments are thus expected to rise going forward.

As per a report from the International Energy Agency, total global coal demand for coal is estimated to touch 9 billion tons by 2019. Per the report, coal demand will grow at an average rate of 2.1% per year through 2019. China will be responsible for nearly 60% of the global increase in coal demand, despite its efforts to moderate consumption over the long run.

Check out our latest Coal Industry Outlook here for more details from an earnings perspective, and how the trend is looking for this sector from now onwards.

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