Coal Price Slump an Investment Opportunity
Justice Litle - Wed 24 Jan, 2007
...Coal is dirty, lumpy and unremarkable. Even so, the world will not be going off coal anytime soon. Energy economics tilt heavily in coals favour...
- As far as the public is concerned, coal is the Rodney
Dangerfield of fossil fuels: It gets no respect. Coal is
dirty, lumpy and unremarkable. It is a game show booby
prize, a punishment for bad children at Christmas. In
terms of our daily lives, coal is almost wholly out of
sight and out of mind.
- Yet the entire Industrial Revolution was founded on
coal. (The steam engine gets all the press...but think
of the steam engine as the Lone Ranger and coal as
Tonto. Without his trusty companion, the Lone Ranger
would never have gotten any glory.)
- Oil may hog the limelight these days, but coal has not
gone dormant. If anything, today’s world relies on coal
more than ever before. According to recent figures from
the World Coal Institute, 24.4% of primary energy
consumption worldwide comes from coal.
- Coal’s share of worldwide electricity generation is
40.1%. In the United States, more than half the
country’s electricity comes from coal; in China and
Australia, the totals approach 80%; in Poland and South
Africa, the totals are above 90%.
- For perspective on how much physical coal the world
eats up, consider this: According to the science Web
site, howstuffworks.com, the electricity required to
power a single 100-watt light bulb, if left on 24 hours
a day, would consume 714 pounds of coal over the course
of a year. Most of us do not leave our lights on round
the clock, but we tend to have many going
simultaneously. (Never mind all the other doodads and
gizmos around the house.)
- As it turns out, the world’s heavy coal users — folks
like you and me — don’t even know they have a habit.
That ignorance is a luxury, provided by the blessings of
modern technology. For the majority of its history, coal
has been a particularly nasty source of urban pollution.
- Blackened lungs and reddened eyes go all the way back
to the High Middle Ages. In the year 1285, King Edward I
— commonly known as Edward the Longshanks — had two
great battles on his hands. In Scotland, there was
William Wallace; at home in London, there was coal.
- The King tried, and failed, to curtail London’s use of
coal on public health grounds. Harsh bans and brutal
penalties were put in place, but acrid smoke continued
to foul the air. With the city growing rapidly and the
forests in retreat, London’s pressing need for fuel and
heat trumped all else.
- Some 500 years after Longshanks, the potent
combination of coal and steam had transformed England
and kicked off the Industrial Revolution. By the 1850s,
Britain was officially urbanized, with 51% of the
population living in cities. And what living hells those
early industrial cities were, Manchester chief among
them: sky black with smoke, ground black with soot, the
very air choked with dust.
- Scores of Manchester children were struck with
rickets, a vitamin deficiency malady that softens the
bones due to lack of exposure to sunlight. Fifty-seven
percent died before the age of five. Those children who
survived typically toiled the rest of their lives away
in the factories and the mines.
- All that misery is gone now (in the West, at any
rate). Modern coal-fired power plants are paragons of
efficiency and discretion. Leviathan jets of flame 10
stories high consume as much as 500 tons of coal per
hour, hidden in the confines of gigantic boilers that
convert heat into steam and steam into electricity. It
all happens behind closed doors, on guarded grounds
outside city limits. We no longer see, smell or taste
the coal. We only flip on the light switch.
- Yet, for all the cleaning up the coal industry has
done, we are still paying a heavy toll for coal use.
Western coal plants no longer belch black smoke; their
emissions have been vigorously scrubbed and filtered, in
accordance with the law. But these scrubbed emissions
still make a disturbing contribution to the likes of
acid rain and other "slow-fuse" environmental concerns
like rising carbon dioxide emissions.
- And in less fastidious jurisdictions – like the entire
country of China – "unscrubbed" emissions from coal-
fired plants have produced some of the most toxic cities
in the world. Many Chinese cities resemble the
Manchester, England of old.
- The New York Times reports that China uses more coal
than the United States, Japan and the European Union
combined. China’s plants are older, less efficient and
produce more toxic emissions than their regulated
Western counterparts. China’s massive pollution clouds
have been known to travel the breadth of oceans,
clogging up filters as far away as Lake Tahoe. With
India following in China’s sooty footsteps, a global
pollution epidemic may be in the works.
- So should we feel gratitude or disgust toward Old King
Coal? It’s hard not to feel a mixture of both. On the
whole, coal has been very good to us. As a driver of the
Industrial Revolution, however hellish initial
conditions were, coal brought about the rise of
manufacturing and the high standards of living the West
now enjoys.
- As an ongoing source of cheap power, coal now gives
China and India a chance at continued rapid growth. But
none of this is without cost. China possesses seven of
the world’s ten most polluted cities, thanks largely to
the country’s heavy reliance on coal-fired electricity.
- Even so, the world will not be going off coal anytime
soon. Energy economics tilt heavily in coal’s favour,
especially in the developing world. New coal plants,
still being built at a rapid clip, have operating life
spans of half a century or more. It wouldn’t make sense
to mothball them prematurely. Countless existing plants
have decades left to go.
- Last, but certainly not least, countries like China
and India also have to deal with an emerging middle
class and the rise of consumption-based lifestyles. They
may need all the energy sources they can get their hands
on – both dirty and clean – to keep up with demand in
future years.
- Meanwhile, coal-to-liquids technologies, as well as
various "clean coal" technologies, will continue to
promote demand for coal throughout the Developed World.
Given all these demand factors, $40-a-ton coal seems way
too cheap.
- It is interesting to note that the price of coal,
relative to the price of crude oil, has slumped to its
lowest level in a decade. This relationship does not
necessarily imply that coal prices are approaching an
important bottom, but it does suggest the possibility.
- Long-term investors take note.
Regards,
Justice Litle,
for The Daily Reckoning
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