Market Overview

The Factors Keeping The Coal Industry Alive


Energy analysts downplay coal as a fuel source and are quite skeptical about its prospects. But the Trump administration remains committed to the industry's competitive position through the relaxation of emissions rules.

Apart from the relaxation of stringent environment legislation, coal demand also benefit from the higher price of natural gas and improvement of coal prices in the global market. An increase in steel production from Asian countries like China and Japan will pave the way for shipments of metallurgical coal.

Per a report from the World Coal Association, there are currently 861 billion tons of proven coal reserves worldwide, implying that there is enough coal to last nearly 112 years at the current rates of production. Compared with this, proven oil and gas reserves are predicted to last around 46 and 54 years, respectively, at the current production levels.

The current availability of coal even outpaces the combined proven reserves of oil and gas. So, the advantages of coal cannot be overlooked, and may be expected to brighten long-term prospects of investors.

Trump's decision to walk out from the Paris Climate Agreement and repeal the Clean Power Plan should keep fossil fuel-based electricity generation afloat longer. Also, the recent Supreme Court ruling temporarily halted the implementation of the Clean Power Plan.

Let's dig a little deeper into the factors driving this industry.

Coal's Share in U.S. Power Generation: Despite usage of natural gas, coal is still among the major sources of fuel for electricity generation in the United States. Per the U.S. Energy Information Administration's ("EIA"), release, coal's share in electric generation was 30% in 2017 and is expected to average nearly 30% in 2018 as well.

Even with a decline of coal's share in power generation from historical levels, it is quite heartening to notice that the U.S. electricity generation is increasingly shifting to refined coal. Per EIA, use of refined coal has increased from 17% of power sector coal consumption in 2016 to nearly 19% in 2017. We expect the rising awareness among the U.S. utility operators to lead to increased usage of refined coal in power production, which has less emissions compared with conventional coal.

In addition, the utility operators in the United States are installing mercury control equipment in the coal fired plants to meet the emission control standards, a big positive for the coal industry in the country.

EIA release showed the delivered coal price averaged $2.10 per million British thermal units (MMBtu) in 2017 and is expected to increase to $2.21/MMBtu in 2018.

Coal as Input for Steel Industry: Due to its heat-producing nature, hard coal (metallurgical or coking coal) forms a key ingredient in the production of steel. Nearly 70% of global steel production depends on coal. Since "met coal" is an essential ingredient for the production of steel, U.S. met-coal producers are likely to benefit from the increase in steel consumption.

Although the steel industry is expected to remain under pressure for some time, it is certainly expected to grow on the back of flourishing automotive and construction industries. A recent report by The World Steel Association showed that world crude steel production reached 1,691.2 million tons (Mt) in 2017, up 5.3% from 2016. Steel production in 2018 is expected to improve from 2017 levels. This definitely is a ray of hope for metallurgical coal producers and will boost prospects of metallurgical coal producers such as Arch Coal Inc. (ARCH).

Demand Upsurge in Asian Countries: The increasing demand for coal in Asian economies like China and India has been a key price driver since the end of recession in 2009. We expect this trend to continue in the future, primarily owing to rising energy needs in India, China and Southeast Asian countries.

Though Asian countries also produce coal, it is not sufficient to meet the growing demand in the region, resulting in regular imports. Southeast Asia has a surging demand for electricity, chiefly due to its improving economies. Numerous coal-based power plants are presently under construction and more are being planned over the next few years. This will create ample export opportunities for the U.S. thermal coal producers. Per a International Energy Agency release, coal imports in India will increase 5% per year through 2022.

Per EIA, coal production increased 45 million short tons (MMst) (6%) in 2017 to 773 MMst in response to high demand for U.S. coal exports. However, coal exports are expected to drop in 2018 due to use of cheap natural gas.

Recently, Cloud Peak Energy (CLD) entered into a long-term coal export sales agreement with JERA Trading Pte Ltd. for supplying coal to two power plants in Japan. The coal shipment is expected to begin at the end of 2019 and is likely to continue for a period of 30-40 months. The coal export volumes are expected to touch 1 million metric tons in the final year of contract.

Not Just Electricity Generation: Electricity generation is just one use of coal in the United States. Manufacturing plants and industries use it to make chemicals, cement, paper, ceramics and metal products, etc. Methanol and ethylene, which can be prepared 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. Per the EIA, consumption of coal in other sectors is expected to remain flat in 2018 at 52.4 MMst and increase by 0.7 MMst year over year to 53.1 MMst tons in 2019.

New Coal Focused Company: The much awaited spin-off of CONSOL has resulted in the formation of coal-focused CONSOL Energy Inc. (CEIX), which will have interest in the Pennsylvania Mining Complex, the Baltimore Marine Terminal and approximately 1 billion tons of greenfield coal reserves.

To Sum Up

Interestingly, among all other coal companies, Contura Energy (CNTE), carrying a Zacks Rank #3, seems to be operating on a different level. The company surpassed earnings estimates in three of the last four quarters. Contura Energy is expected to come out with positive earnings surprise this season as well.

For the aggressively growing and energy-hungry Asian economies, coal seems to be the most popular source of power generation, despite inroads being made by renewables. In a global scale, the importance of coal as a fuel source is far from over, but U.S coal producers will continue to face tough competition from the coal exporters in Australia, Indonesia and Russia.

Coal is by far the most stable source of energy. The majority of the coal consumed in the United States is actually produced in America and the coal industry provides jobs to thousands of Americans. The "America First" approach of President Trump will help the coal stocks to remain in focus.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributor contributorsEmerging Markets Commodities Markets


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