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Trump and Other Drivers of Coal Industry Prospects

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The majority of energy-sector analysts are quite skeptical of coal’s future as an energy source. Coal as a fuel source is passé in the United States, but there is no denying that the commodity is a powerhouse for fuel on a global scale.

Stringent emission rules and regulations had lowered the importance of coal in the U.S. But the Trump administration remains committed to support the industry through regulatory relaxation.

Apart from the roll-back of stringent environmental legislation, coal demand is also benefiting from higher usage in other industries in addition to electricity generation. An increase in steel production from Asian countries like China and Japan is helping support shipments of metallurgical coal.

Per a report from the World Coal Association, the current availability of coal even outpaces the combined proven reserves of oil and gas. So, the advantages of coal cannot be overlooked, and may be expected to brighten long-term prospects of investors.

Trump’s decision to walk out from the Paris Climate Agreement and repeal the Clean Power Plan should keep fossil fuel-based electricity generation afloat longer. Also, the recent Supreme Court ruling temporarily halted the implementation of the Clean Power Plan.

Let’s dig a little deeper into the factors driving this industry.

Coal’s Share in U.S. Power Generation: Despite usage of natural gas, coal is still among the major sources of fuel for electricity generation in the United States. Per the U.S. Energy Information Administration’s (“EIA”) release, coal’s share in electric generation was 30% in 2017 and is expected to be the same in 2018.

Even with a decline of coal’s share in power generation from historical levels, it is quite heartening to notice that the U.S. electricity generation is increasingly shifting to refined coal. Per EIA, use of refined coal has increased from 17% of power sector coal consumption in 2016 to nearly 19% in 2017. We expect the rising awareness among U.S. utility operators to lead to increased usage of refined coal in power production, which has fewer emissions compared with conventional coal.

In addition, the utility operators in the U.S. are installing mercury control equipment in the coal fired plants to meet the emission control standards, a big positive for the coal industry in the country.

Coal as Input for Steel Industry: Due to its heat-producing nature, hard coal (metallurgical or coking coal) forms a key ingredient in the production of steel. Nearly 70% of global steel production depends on coal. Since “met coal” is an essential ingredient for the production of steel, U.S. met-coal producers are likely to benefit from the increase in steel consumption.

Although the steel industry is expected to remain under pressure for some time, it is certainly expected to grow on the back of flourishing automotive and construction industries. A recent report by The World Steel Association showed that world steel demand will touch 1,616.1 million tons (Mt) in 2018, up 1.8% from 2017. Steel demand is expected to move up by 0.7% in 2019 to touch 1,626.7 Mt. This definitely is a ray of hope for metallurgical coal producers and will boost the prospects of companies like Arch Coal Inc. (ARCH - Free Report) .

Demand in Asian Countries: The increasing demand for coal in Asian economies like China and India has been a key price driver since the end of the Great Recession. We expect this trend to continue in the future, primarily owing to rising energy needs in India, China and Southeast Asian countries.

A recent EIA release shows that a number of countries in and around the Middle East will start adding coal fired power plants. Per the report, over the next decade, nearly 41 GW of coal fired units will be added in the region, creating demand for thermal coal.

Though Asian countries also produce coal, it is not sufficient to meet the growing demand in the region, resulting in regular imports.

Cloud Peak Energy (CLD - Free Report) entered into a long-term coal export sales agreement with JERA Trading Pte Ltd. for supplying coal to two power plants in Japan. Coal shipment is expected to begin at the end of 2019 and is likely to continue for a period of 30-40 months. Coal export volumes are expected to touch 1 million metric tons in the final year of contract.

Not Just Electricity Generation: Electricity generation is just one use of coal in the United States. Manufacturing plants and industries use it to make chemicals, cement, paper, ceramics and metal products, etc. Methanol and ethylene, which can be prepared from coal gas, are used to make products such as plastics, medicines, fertilizers and tar.

Certain industries consume large amounts of coal. For example, concrete and paper companies burn coal, and the steel industry uses coke and coal by-products to make steel for bridges, buildings and automobiles.

New Coal Focused Company: The much-awaited spin-off of CONSOL has resulted in the formation of coal-focused CONSOL Energy Inc. (CEIX - Free Report) , which will have interest in the Pennsylvania Mining Complex, the Baltimore Marine Terminal and approximately 1 billion tons of greenfield coal reserves.

To Sum Up

Interestingly, among all other coal companies, Warrior Met Coal Inc. (HCC - Free Report) , sporting a Zacks Rank #1 (Strong Buy), seems to be operating on a different level. The company surpassed earnings estimates in the last four quarters. Warrior Met Coal is expected to come up with positive earnings surprise in the second quarter as well. You can see the complete list of today’s Zacks #1 Rank stocks here.

For the aggressively growing and energy-hungry Asian economies, coal seems to be the most popular source of power generation, despite inroads being made by renewables. On a global scale, the importance of coal as a fuel source is far from over, but U.S. coal producers will continue to face tough competition from the commodity’s exporters in Australia, Indonesia and Russia.

Coal is by far the most stable source of energy. The majority of the coal consumed in the United States is actually produced in America and the coal industry provides jobs to thousands.



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