Coal Outlook Promising for Investors

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Coal Outlook Promising for Investors

by David Fessler, Investment U Senior Analyst

Thursday, October 6, 2011

Earlier, I talked about the 25-year outlook for liquid fuels based on the Energy Information Administration’s (EIA) International Energy Outlook 2011. It’s the EIA’s annual 25-year energy forecast, and it contains important information for investors who are considering an investment in the energy sector.

Now, I’ll cover the future of coal in the world energy picture.

Many countries lack energy policies (including the United States) that restrict or otherwise limit the use of coal. As a result, the use of coal is projected to rise from about 139 quadrillion Btu in 2008 to 209 quadrillion Btu in 2035. That’s an average annual increase of 1.5 percent.

Although coal power generations should decline in the United States, dramatic increases are set to occur in non-OECD Asian countries, primarily India and China. China will double its coal-fired power generation capacity between now and 2035.

World Coal Consumption by Region, 1990 - 2035

Coal use in China’s industrial sector will be up by 67 percent over the same time period.

India’s power generation will rise 72 percent between 2008 and 2035, as its industrial sector use will increase by 94 percent!

Types of Coal Used for Power Generation

Coal is generally classified into two types – soft coal and hard coal. Soft or low-rank coal is either lignite or sub-bituminous. It represents about 47 percent of mined coal. Both are used for power generation, and some sub-bituminous is also used to manufacture cement.

Hard coal is either bituminous or anthracite. Today, anthracite represents only about one percent of all coal mined, with bituminous making up the rest.

Bituminous is further divided up into coking coal – also called metallurgic coal – and steam or thermal coal which is used in power generation and other industrial processes.

While power-generating coal production is likely to slightly increase, the largest gains should be in the industrial sector with metallurgical coal.

Two Coal Mining Companies To Watch

Two great coal miners that will benefit are:

  • Walter Energy, Inc. (NYSE: WLT) - Walter is the largest metallurgical coal producer, and its purchase of Western Coal gives it a huge leg up in the export markets.

  • Arch Coal, Inc. (NYSE: ACI) - Arch Coal is the second largest U.S. coal company, and it recently revised its earnings guidance to be in the $900-million to $1-billion range for 2011. This is the highest in the company’s history, but slightly below its guidance of this past July.

With the overall sell-off of commodities, shares of these companies can be had at bargain prices relative to historical levels. Investors looking at the long-term, big picture may be richly rewarded down the road.

Good investing,

David Fessler

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