Chicago, IL – July 16, 2015 – Today, Zacks Equity Research discusses the Coal (Part 2), including Westmoreland Coal Company (WLB), Billiton Limited (BHP), CONSOL Energy (CNX). Alpha Natural Resources Inc. (ANR) and Peabody Energy Corporation ( BTU). Industry: Coal (Part 2) Link: https://www.zacks.com/commentary/50941/is-coal-as-easily-replaceable-as-you-think Stringent regulatory measures to control emissions are having an adverse impact on the unrestricted use of thermal coal for power production. Despite this fact, 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 you can see, the current availability of coal even outpaces the combined proven reserves of oil and gas.
In a major affirmation, the U.S. Supreme Court suggested earlier this month that the Environmental Protection Agency (“EPA”) review its Mercury and Air Toxics Standards (“MATS”). The EPA has to do a further cost-benefit analysis to “decide within limits of reasonable interpretation” how to account for costs in implementing MATS. The final decision of the matter rests with the DC Circuit Court. The favorable Supreme Court ruling is undeniably a moral victory for the coal companies though it might be too little, very late.
The crucial question is what’s keeping the coal industry afloat amid rising competition from other fuel sources and a hostile regulatory climate. We’ve attempted to address these factors below.
Coal Dominates U.S. Power Generation: Coal as a major source of generating fuel dominates the utility industry. As per the Energy Information Administration (EIA), coal was the generating fuel for nearly 39% of the electricity consumed in the U.S. in 2014. Electricity generation absorbs more than 90% 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.
Long-term Supply Agreements: Westmoreland Coal Company (WLB) announced that it has agreed to acquire the San Juan Mine in Farmington, NM from BHP Billiton Limited (BHP) and enter into a new long-term coal supply agreement with the owners of the San Juan Generating Station (“SJGS”). The new coal supply agreement states that Westmoreland will take over operations from the beginning of 2016. The new coal supply agreement expires in 2022.
CONSOL Energy (CNX) with its thermal coal marketing strategy continues to see success by contracting additional volumes and building a portfolio that targets power plants expected to not only survive but increase electricity generation in spite of the stringent regulatory environment.
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. 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, crude steel usage worldwide is projected to increase by 0.5% in 2015 to touch 1,554 million tons (Mt), while 2016 steel usage is expected to go up by 1.4% over the prior year to 1,565 Mt.
Since met coal is an essential ingredient for the production of steel, U.S. met coal producers like Alpha Natural Resources Inc. ( ANR) could benefit from the increase in consumption of steel.
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.
As per a report from the International Energy Agency, total global coal demand 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 demand surge, despite its efforts to moderate consumption over the long run. India too is expected to join China in the energy race for more coal, which will offset the decline in coal usage in Europe and the U.S.
The two Asian countries also 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, U.S. miners will find it attractive to export coal to these regions. We expect Peabody Energy Corporation (BTU) with its Australian platform to leverage the demand for coal in the Asian markets. Peabody through its trading and business office in India will cater to the rising need for met and thermal coal in the country.
To Sum Up
The importance of coal in the fuel source chain is far from over. 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 tonnes by 2017. Peabody also expects the new steel plants which are being constructed in some coastal areas in Asia are going to require more than 30 million tons of seaborne metallurgical coal by late 2016.
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WESTMORELAND CO (WLB): Free Stock Analysis Report
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