Cheaper ‘Toxic Rock’ May Presents an Opportunity for Investors
Despite statistics released by the U.S. Energy Information Administration (EIA) supporting an increase in the long term usage of coal as a form of energy, both delivered coal prices and coal stocks have experienced declines over the past year. This article explores the potential investment opportunity presented by cheaper ‘toxic rock’. It reflects not only the challenges and potential benefits of investing in coal but also aims to inform investors how exposure to the coal industry can be achieved.
By Yasin Ebrahim
A ROCKY RIDE for coal demand in the past year has lowered prices to attractive levels. Several factors are exerting downward pressure on the average delivered coal price. These include; lower electricity demand, lower
natural gas prices prompting utility companies to switch from coal to natural gas power plants, and concerns regarding an energy cap that seeks to limit carbon emissions. However, coal is cheap, easy to extract and
ample in supply. Coal currently provides 29.6% of global primary energy needs and generates 42% of the world’s electricity according to the World Coal Association. Population and income growth are the main drivers of energy demand. Demand for the coal in the long term is supported by current statistics released by the U.S. Energy Information Administration (EIA) which expects coal consumption to increase from 139 quadrillion Btu in 2008 to 209 quadrillion Btu in 2035 (Figure 1). Primary drivers for an increase in expected demand of coal are Asian countries, more significantly China – the world’s largest energy consumer which uses close to half of the world’s coal. China’s annual coal demand is expected to reach 3.9 to 4.3 billion tonnes by 2025. Despite China’s attempt at adopting a more
diverse energy mix – investing heavily in renewable energy resources such as hydro, wind, solar and biomass power – it still relies significantly on coal fired powered plants to provide approximately 80% of its electricity.
Coal currently provides 29.6% of global primary energy needs and generates 42% of the world’s electricity
However, China is not alone in its preference
for coal as the main provider of energy. Australia, Poland, India and South Africa use coal as a major generation fuel. India is expected to increase it’s use of coal-fired power plants from 99 GW in 2008 to 172 GW by 2035, an increase of 60%. South Africa, the world’s fifth largest coal producer, relies on coal
to produce 93% of its electricity needs and coal is the country’s third largest source of export revenue. Environmental conservation efforts such as the
proposed U.S. Waxman-Markley Energy Bill [aka the American Clean Energy and Security Act] has given rise to the use of clean-coal technology. Clean-coal technology seeks to reduce
harsh environmental effects by using multiple technologies to clean coal and contain its emissions. Acceptance of this bill will increase preferences
towards the use of clean-coal technology, inevitably raising coal demand.
World Coal Consumption (Quadrillion Btu) 250 209 Btu by 2035 200 150 100 50 0 Source: EIA
These facts point favourable towards coal demand and are supported by analysts at UOB-Kay Hian Ltd– the largest listed securities company in Singapore – who believe China’s “strong demand and supply tightness should continue to support coal price uptrend in 2012”.
‘Stuck Between a Rock & a Hard Place’ China relies largely on domestic energy resources
to develop its economy. Coal is China’s largest energy resource and the Chinese domestic market is more than three times the entire international coal trade. As a result, a minor shortage in supply of coal leads to increases in world coal prices. On the domestic front, this shortage could be
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