COAL IS LIKELY TO REMAIN KING FOR A WHILE, BUT ITS A MONARCHY LIVING ON BORROWED TIME / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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SEPTEMBER 16, 2010.

Coal Isn't Burned Out Just Yet

By LIAM DENNING

The future is coal? Energy expert Daniel Yergin reckons coal will remain the top fuel for power plants globally for the next two decades.

Output from sources like solar power is increasing faster in percentage terms, but remains tiny in absolute terms. Coal is the second-largest source of energy overall, and average demand growth over the past five years was 3.5%, much faster than for oil or natural gas. The extra coal the world burned in 2009 relative to 2004 was roughly equivalent to the entire energy consumption of Germany and France combined last year.

Coal benefits from three things. Unlike oil, coal reserves are widely distributed. Coal also is relatively cheap, calorie for calorie, averaging about one-third the price of oil and less than half the price of natural gas over the past 15 years.

Coal's third advantage isn't inherent to it. Rather, it benefits from faltering momentum toward putting a price on carbon emissions in the U.S.

U.S. carbon pricing remains likely at some point, so investment in new coal-fired power plants should stay on hold. Investment bank Tudor, Pickering, Holt expects coal-fired generation capacity to peak in 2011. That could limit growth in U.S. coal demand, but in the absence of a carbon price it shouldn't fall either.

Meanwhile, other markets are expanding, most notably China, which accounts for about half of global coal demand. Besides power generation, China is a big user of higher-priced metallurgical coal, used to make steel.
Another country to watch is India. It accounted for just 7.5% of global coal consumption last year. But per-capita usage is less than a fifth that of China, says Goldman Sachs, suggesting huge potential.

This Asian opportunity, together with regulatory uncertainty in the U.S., should aid two stocks, Peabody Energy and Consol Energy.

Peabody is active in Australia, particularly mining metallurgical coal, which accounted for 3% of last year's sales by volume, but 23% of revenue. Peabody tried to buy Australian miner Macarthur Coal this year, but eventually walked away. Still, the company's effort to diversify away from home is strategically sound.

Consol, meanwhile, produces not just coal, but also gas, which accounts for roughly a fifth of earnings before interest, tax, depreciation and amortization.

Consol's mix means that if coal comes under regulatory pressure in the U.S., demand for its other product, gas, should rise. Alternatively, if gas prices rise, demand for coal should increase as some power generators switch to the cheaper fuel.

Such hedged bets make sense if coal remains king, but one living on borrowed time.

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