First, natural gas is a lot tougher to transport than coal is. It requires a much more complex infrastructure, including massive pipeline networks and complex liquefaction and regasifaction terminals. In contrast, coal can be shipped more easily, typically requiring only existing railroads, ports, and roads.
Second, unlike in the U.S., where natural gas prices are market-determined, the prices in Europe and Asia are indexed to oil on an energy-equivalency basis, as measured by BTUs. That means coal should continue to be much more competitive in the international arena than it is in North America.
In fact, a January report by the International Energy Agency forecasted that coal will surpass even oil as the largest energy source by 2017. China and India, which together account for roughly a third of the world’s population, are expected to be the primary drivers of this projected increase in global demand.
As these large, emerging economies continue to grow and their citizens transition toward higher income levels, their demand for energy will increase much faster than demand from developed countries. According to some estimates, China and India’s total consumption of coal for electricity generation will be nearly double that of all the member nations of the Organization for Economic Cooperation and Development put together.
Coal companies look to foreign markets
To capitalize on these expected trends, numerous U.S. coal companies are planning to boost their export capacity. For instance, Alpha Natural Resources, Inc. (NYSE:ANR) , which exported just 14 million tons of coal in 2011, has boosted its export capacity to about 25 million tons per year.
And Peabody Energy Corporation (NYSE:BTU) last year announced that it entered into an agreement with Kinder Morgan Energy Partners LP (NYSE:KMP) to expand its export platform in the Gulf Coast. The deal provides Peabody Energy Corporation (NYSE:BTU) with greater access to export coal from Kinder Morgan Energy Partners LP (NYSE:KMP)’s Deepwater, Houston Bulk, and International Marine terminals and boosts its Gulf Coast export capacity to between 5 million and 7 million tons per year.
Final thoughts
If gas prices continue to rise further, coal will become increasingly more attractive. However, there is one factor working against its comeback — tightening environmental regulations.
Because coal spews far greater quantities of greenhouse gases into the atmosphere than does natural gas, more stringent environment regulations are sure to have a disproportionately negative impact on the demand for coal. In fact, Exelon Corporation (NYSE:EXC) CEO Christopher Crane recently said that some 19,000 megawatts of coal-fired plant capacity is scheduled to be permanently retired by 2015 because of tougher environmental regulations.
Coal might be down, but it’s far from out. Even though the EIA forecasts only a modest increase in U.S. coal production over the next couple of years — 1% in 2013 and 1.3% in 2014 — the global market points to a much brighter future for King Coal and for aptly positioned U.S. coal producers.
The article A Comeback for King Coal? originally appeared on Fool.com is written by Arjun Sreekumar.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Exelon and Southern.
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