With Or Without US Support, King Coal Will Do Just Fine

Updates

August 24, 2013: Barron's on Peabody. Coal will do just fine.

Additional coal demand is coming from Japan and Germany, which are shunning nuclear power. And the need for electricity continues to grow in emerging markets such as China and India, where coal-fired plants are the cheapest source of electricity. "Demand continues to grow globally and in the U.S.," says Peabody's chairman and CEO, Gregory Boyce.

There is worldwide demand for roughly eight billion tonnes of coal annually. (A metric tonne is equal to about 1.1 ton, or short ton, the standard in the U.S..) In the next four years, he estimates, annual demand could increase by 1.2 billion tonnes. "A year from now, pricing is going to be higher than it is today," he says.

August 11, 2013: a nice article at The Oil Drum about coal, supporting my worldview. 

This collapse of hope for a potential resource has led the Polish Government (who are responsible for ensuring that the country has enough fuel at a viable price) to move back toward the greater use of lignite as a power source. Coal is the fuel for the power stations that produce 90% of the country's electricity, and lignite is readily and cheaply available. Prices for lignite (a brown coal that is softer and not yet fully geologically morphed into the harder black coal most envisage when coal is discussed) are quoted as giving a price of $2.00 per gigajoule, roughly a fifth of the cost for black coal. The country has large deposits of lignite, much of which is available for surface mining, at relatively low financial cost.

The government decision underscores a point that I have made a number of times, namely that as other fuel costs increase more and more countries will move to the use of coal, where it is domestically available and relatively inexpensive in financial cost, to produce.

August 9, 2013: wow, that didn't take long. Coal companies rally today.

Coal stocks jumped Friday after credit rating agency Moody’s raised its coal industry outlook to stable from negative.

Moody’s report sums its view: “Business Conditions Hit Bottom.” Moody’s said it “does not expect industry fundamentals to deteriorate further over the next 12 to 18 months, though business conditions remain very weak.”

Look at the numbers:

Alpha Natural Resources and James River Coal each rose nearly 12%. The largecap U.S. coal players also rallied: Arch Coal was up 10%, Peabody Energy jumped nearly 9% .

Original Post

 

Before reading this long article, please read the back story. Bloomberg is reporting:

The world’s richest nations, moving to combat global warming, are cutting government support for new coal-burning power plants in developing countries, dealing a blow to the world’s dominant source of electricity. 

Don sent me that article, outlining tectonic shifts in the coal industry. The article bounces all over.  

The story does not support the lede, or Bloomberg's thesis.

As I read through the article for the umpteenth time, trying to come up with an analogy, it finally came to me. There is actually a bit of irony.

Go back to the demise of the Keystone XL 1.0 and 2.0.

Killing the Keystone was a seminal event; years from now, economists and historians will note the tectonic change that occurred when the Keystone XL was killed: the resurgence of America's railroads. Regardless of how the Keystone plays out, the fact remains: the way America moves crude oil is forever changed.

And it all goes back to the man who killed the Keystone: President Obama.

So, it is ironic that it is very likely that President Obama will also inadvertently completely change the way coal is moved globally and the way utility plants are financed. There will be new winners and new losers.

According to the linked Bloomberg article, President Obama is leading the effort to deny financing for new overseas coal-powered utility plants by pledging that the US government would no longer finance overseas coal plants through the US Export-Import Bank. The World Bank and the European Investment Bank have since followed suit.

Sounds like the death knell for coal? Not really.

First of all, according to Bloomberg again, this action will have minimal (if any) effect on the biggest user of coal, China. Not only can the Chinese finance their own coal plants, China can and will finance coal plants for other countries (see below).

Second, the Bloomberg article clearly states the initiatives by the US and Europe to minimize kill financing will have "limited" effect:

China can finance its own projects, and India has only relied on export financing in a few cases. As a result, the changes are likely to impact other nations in Africa and Asia, and … it turns out .. the US/Export-Import Bank, the World Bank, and the European Investment Bank, all said they would continue to finance coal plants in these emerging nations.

So again, lots of rhetoric, little follow-through.

In fact, I'm trying to figure out exactly what projects the US, Europe, and the World Bank won't finance: China and India don't need outside financial help, and all three "banks" have said they will make exceptions for most countries that are going to build coal plants anyway.

What is likely to happen, according to the Bloomberg article:

… other lenders, especially export-credit agencies from Japan or China, could step in and replace the World Bank, the US, and Europe.

So, just as killing the Keystone shifted the transportation of crude oil to railroads, killing western financing of overseas coal plants will simply shift the access to credit to China and Japan.

Can China and Japan do it? Early in the article:

The US, Europe, and The World Bank pumped more than $10 billion into such initiatives in the past five years." Sounds huge, doesn't it? $10 billion in the past five years.

But then later in the same article:

There’s also the possibility that other lenders, especially export-credit agencies from Japan or China, could step in and replace the World Bank, U.S. and Europe. Japan’s Bank for International Cooperation, its export financing body, has provided more than $10 billion in financing for overseas coal projects, more than any other individual nation.

Japan is in a world of financial hurt, and it will need to invest its money somewhere. When the US pulls out, the Japanese can enter. 

When the Keystone XL was killed, the movers and shakers simply shifted to rail. Huge success. The Obama gift that keeps on giving.

So, back to coal. China and Japan are looking at opportunities. Are their opportunities for coal investment?

First, of all, China wants to ramp up its clean-coal technology export business and the environmental activists are already concerned that China will simply step in when the US steps out. And get this: not only does China finance these new projects, they use their technology. The Chinese will do for clean-coal technology what the Bakken did for horizontal/fracking.

But don't we have enough coal plants already? LOL.

From the article: "The U.S. Energy Information Administration, in a July 25 report, projected world coal use would increase by a third -- to more than 200 quadrillion British thermal units a year -- by 2040 as developing nations boost its use."

And:

"China and India imports have risen year-to-date and are on a pace to increase 15 percent this year to new record levels as the trends to urbanize, industrialize and electrify continue,” Boyce said in a conference call with analysts on July 23."

And:

Coal is now used to generate 40 percent of the world’s electricity, and its use has grown more than 50 percent in the past decade, according to EIA. The U.S. is the world’s second-largest producer of coal, after China, followed by India, Australia and Indonesia. China is the world’s top importer of coal as well, followed by Japan, according to the World Coal Association.

And:

Gregory Boyce, chief executive officer of Peabody, the largest U.S. coal producer, noted that German and Japanese coal use is climbing as they cut nuclear-power generation.

But you know, I don't know what it means to say "40%"  and "more than 50%" but I do understand this:

According to an analysis by the World Resources Institute [these are the activist environmentalists who are worried about global warming] in Washington, 1,200 coal-fired plants are proposed globally, with more than three-quarters of those planned for India and China alone. If all are built, which WRI says is unlikely, that would add more than 80 percent to existing capacity. 

China can finance its projects on its own, and India has only relied on export financing in a few cases. As a result, the recent changes are likely to impact other nations in Africa and Asia, which don’t have the same access to credit. Each group said in some instances it would still finance coal, and activists are worried about those exceptions.

Over the next few months we will read a lot of stories about the Pacific Northwest closing their ports to coal export but the Pacific Northwest is not where the action is. The five major US coal exporting ports are on the East Coast (4) and the Gulf of Mexico (1). The Panama Canal will be wide enough by this time next year to handle the new huge ships.

It looks like things will come together in 2017. The US will have a new president. Pent-up demand for US coal will reach a fever pitch; the "new and improved" Panama Canal will be able to handle huge ships; and, the Chinese will be building and/or financing as many as 1,200 coal-fired plants around the world.

Meanwhile, the president will keep making speeches, and the world will keep moving, with or without him.