This is part one of a two part series on the outlook for the coal industry.
The global coal market has been in decline for the past five or so years, leaving coal miners, such as Arch Coal Inc (NYSE:ACI), Cliffs Natural Resources Inc (NYSE:CLF), Peabody Energy Corporation (NYSE:BTU) and Walter Energy, Inc. (NYSE:WLT) to name a few, looking like value plays. But are they?
Is the coal market set for a rebound, or is the industry in terminal decline?
The global coal industry
The use of coal as a fuel source continues to rise around the world, despite environmentalist movements to stop it. However, recent regulations brought in by China and the US, to reduce CO2 emissions by regulating the construction of new coal fired power plants, are expected to dampen global demand for coal.
According to the National Association of Regulatory Utility Commissioners, 75% of all U.S. coal plants are at least 30 years old, three quarters of the way through the average coal-fired power plants life of 40 years. Usually, this would result in a wave of new constructions, however, low natural gas and oil prices, brought about by the shale boom, along with EPA regulations mean that it is unlikely coal fired plants will be replaced. The EPA has a rule that requires all future coal plants to emit no greater than 1,100 pounds of carbon dioxide per megawatt-hour. The average U.S. coal plant currently emits around 1,700 pounds of carbon dioxide per megawatt hour.
Meanwhile, the Chinese have introduced the Air Pollution Action Plan, which is aiming for coal to make up 65% of the country’s primary fuel usage by 2017, down from 67% last year.
Having said all of that, there are some signs that coal demand could remain robust throughout the next few years. For example, according to John Eaves, CEO of Arch Coal, more than 280GW of coal-burning power station capacity, requiring more than 825m tons of coal annually, is still being built around the world. Additionally, Godfrey Gomwe, chief executive of thermal coal at Anglo American, believes that Chinese and Indian coal demand will grow at a CAGR of 3.9% to 2020, then at a similar but lower rate through to 2030.
This view is supported by forecasts from the International Energy Agency, which expects global coal consumption to hit 5.6 billion tonnes per annum by 2015. Additionally, the IEA believes that coal will overtake oil as the worlds leading energy source by 2030, despite efforts to curb consumption of the black mineral. According to the IEA, global coal consumption hit 4.9 billion tonnes per annum during 2010, up from 3.2 billion tonnes back during 1990.
Elsewhere, as well as implementing regulations to slow the consumption of coal, China is also making moves to support the coal market by regulating supply. Specifically, the approval process of new coal mines within the country is set to be tightened and low-quality coal imports will be banned. New mines with an annual output of less than 300,000 tons will no longer gain approval, and existing mines with annual output of less the 90,000 tons, will be gradually 'eliminated'.
Stay tuned for part two looking at the coal industry…