Joseph L. Shaefer: Wouldn’t it be nice if we didn’t need to rely upon those dreadful fossil fuels like coal, oil, and natural gas? If only we could be warmed in winter by the gentle rays of the sun and cooled in summer by harnessing that sun to power our air conditioners. If only we could employ the gentle breezes that waft across the land in endless abundance.
Alas, such is not to be the case. According to the International Energy Agency, in the decade just passed coal accounted for nearly half of the increase in energy use worldwide. In fact, while we may basking in the glow of an unseasonably warm winter in parts of North America, in the rest of the world another historical anomaly is taking place: coal usage is growing so quickly that it may soon overtake oil as the fuel of choice.
If only we could be citizens of the nation which has largest coal reserves in the world, we might be able to improve our balance of trade, significantly increase exports, and create hundreds of thousands of jobs supplying this commodity to Asia and the rest of the world.
Oh. That’s right. We are.
China, India and the rest of Asia have been the engine that both demands and uses the most coal. In fact, two thirds of the growth in global energy demand of all types has come from Asia for more than two decades.
China actually leads the world in coal production. Since the Chinese are also the world’s largest consumers of coal, however, they are also the world’s largest importer of this energy source. How convenient: the reserves held by the United States dwarf all other nations. In his been truly said that the United States is the Saudi Arabia of coal.
Even though China and India, as well as an elaboration nations, are committed to expand alternative energy sources, to use nuclear power as much as possible, and to continue to build massive dams (China is by far the largest producer of hydroelectric power in the world) they still derive 80% of their electricity from coal-fired power plants. Of course, it isn’t nearly as bad in India; there only 70% of the electricity is derived from coal-fired power plants. Both nations face a similar dilemma; for transportation, for heating and cooling, for manufacturing, and indeed for pulling themselves up by their bootstraps to become fully developed nations, they must and will increase their energy usage. It isn’t as if they have given any other indication; China is the number one producer of coal, India is number three (with the world’s fifth largest coal reserves, by the way.)
In the wake of the Fukushima nuclear power plant disaster in Japan in 2011, even nations that have recently reduced their dependence upon coal by using nuclear power are newly in the market for coal resources. Difficult as it is to imagine, if Germany actually follows through with its plan to dump its clean-burning and recent-generation nuclear plants, it will have no alternative on a large enough scale other than Russian natural gas or German and other nations’ coal. Japan itself, a nation which has always had to import nearly 100% of its energy, is likely to increase its coal consumption from just under 30% of its total to closer to 50%.
In all cases, new technologies in horizontal drilling and fracturing deposits in order to be able to release more natural gas will provide some replacement for off-lined nuclear plants. To avoid even greater dependence upon Russia, Germany, Poland, France and other European nations are looking to unlock the shale gas early indications show are present on the continent. (I’m writing a follow-on to this article about the best ways to play incredibly cheap natural gas, as well. As one tidbit, we need to realize that it adds energy, water and expense to liquefy gas to ship it over the ocean. If it isn’t on the same continent, it is likely that a nation will pay dearly for it, currently about $15 per mcf – way more than coal.)
The good news, for China anyway, is that the world’s two biggest exporters (not the biggest reserves, but the biggest exporters) are in their backyard: Australia and Indonesia. And even better, right in their front yard, Mongolia is developing what is now the world’s biggest untapped coal deposit. The bad news is that their own reserves, or at least the quality thereof, may be depleting more rapidly than they’d like – or like anyone to know. But the indications are there as lower and lower quality coal is mined.
Also, like natural gas, coal requires huge volumes of water to produce. On a per capita basis, China is already stretched in this area. Without the massive runoff from the Tibetan plateau, Chinese citizens would already be seeing their water rationed. Those nations with abundant water and abundant coal are likely to benefit most as the world’s population growth stretches fresh water resources to the limit. (See here and here for who has the water and who doesn’t.)
So what multinational firms might benefit from the world’s growing, not declining, need for coal? For openers, look no further than the USA’s home shores.
Peabody Energy (NYSE:BTU) is the world’s biggest private-sector coal company and a global leader in clean coal solutions. Peabody reaches across six continents to create strategic advantage. The company has some 9 billion tons of proven and probable coal reserves and owns, through its subsidiaries, majority interests in 30 coal operations located throughout all major U.S. coal-producing regions and in Australia. It also has a growing presence in Mongolia. (For the best information on coal and other opportunities in Mongolia, I highly recommend the articles of my fellow contributor Jon Springer.)
Peabody is also the major factor in the Powder River Basin, even bigger than Cloud Peak Energy (NYSE:CLD), which I have written about in previous articles. With solid coal seams up to 100 feet thick(!), a low sulfur content and convenient train-loading capabilities, Peabody Energy’s operations in Wyoming’s Powder River Basin provide more than 140 million tons of coal each year for customers in the United States and around the world. The North Antelope Rochelle Mine alone has shipped more than a billion tons since mining began in the early 1980s – and it enjoys the distinction of supplying the lowest sulfur coal (the “cleanest” at the point of extraction) on the entire continent. That mine alone accounts for more than the total output of most companies and many coal-producing nations. Thank you, Mother Nature.
The combination of the world’s biggest coal producer, BTU, with the railroad that ships more of the stuff out of the Powder River Basin than any other railroad company, Berkshire Hathaway’s BNSF, would make for an interesting corporate combination. I have no information that such an event would ever occur, mind you – I’m just sayin’ …
While BTU supplies both metallurgical (“coking”) coal for making steel as well as thermal coal to provide power, its primary product is thermal coal. Canada’s Teck Resources (NYSE:TCK), on the other hand, is the second-biggest metallurgical coal company in the world, and is huge in copper and zinc mining, as well. (And also happens to have significant oil sands acreage!) Teck’s metallurgical coal business is well positioned to serve the China market with the high quality product needed for today’s large blast furnaces. With China’s steel production growth having slowed, pricing has weakened, but that won’t last.
China now consumes 40% of global copper supply. The Teck copper business produced $1.67 billion in EBITDA in 2011. Copper is considered a leading economic indicator and a symbol of industrialization. Teck plans to double the size of its copper business over the next five years through the expansion of existing and building of new mines.
And just this week, TCK and the National Agricultural Technology Extension Service Center of the Ministry of Agriculture of China (NATESC) announced an agreement to demonstrate and promote zinc fertilizer use in China. Zinc deficiency is a worldwide problem that has serious impacts on agricultural production and human health. Over 450,000 children around the world die every year as a result of zinc deficiency. In China, 60% of arable land is classified as zinc-deficient, with critical conditions in many dry areas. Zinc deficient soil can result in stunted crop growth and the inefficient uptake of essential nutrients.
Worried about the environmental impact of coal? So should we all. But even that area is being attacked with gusto. The US government disperses billions of taxpayer dollars dispensed by bureaucrats with little in-depth knowledge of the solar, wind, biomass and, thus far the biggest boondoggle of all, corn-based temperate climate ethanol, industries they so lavishly reward with our money. On the other hand, the research and development being conducted by coal companies to clean coal at the source, liquefy it, gasify it, or clean it of emissions at the smokestack goes largely unheralded and in fact denigrated by the bureaucrats whose jobs depend on disbursing (dispersing!) taxpayer dollars.
Worldwide, there are now plans to build over 1000 new coal-fired plants. Rather than complain about dirty coal, perhaps we should take some of those Solyndra campaign-contribution-for-handout dollars and put them to good use. (Or leave those dollars in taxpayers’ pockets rather than moaning that consumers aren’t spending!) One way to avoid importing oil and clean up the environment is to use Coal-to-Liquids [CTL] technology, where pollutants are removed at the source. The worldwide leader in this technology is Sasol (NYSE:SSL), the world’s largest producer of synthetic fuels, both CTL and GTL [Gas-to-Liquids.] Like all coal companies, South African multinational SSL is depressed right now, selling on the NYSE at just 9 times earnings with a 5% yield. ). Since 3 of the world’s top 4 energy consumers also hold the most reserves (The U.S., China, and India) I see SSL’s technology as having quite a sustainable market.
There are two other approaches you might want to consider, as well. The first are the coal royalty firms that buy or lease coal-bearing lands then lease or sub-lease them to the big operators. My favorites here are Natural Resource Partners (NYSE:NRP) and Penn Virginia Resources (NYSE:PVR). Both are rock-steady earners and both yield more than 8% year in and year out. Finally, for those who prefer the diversification of ETFs, you might take a look at Market Vectors Coal (NYSEARCA:KOL) or PowerShares Global Coal (NASDAQ:PKOL).
Markets go up and markets go down. But basic materials are needed every day. Their pricing fluctuates with supply and demand but the need doesn’t go away. Does Japan need to rebuild after Fukushima? That will take thermal coal, steel and copper. Does India need to create an infrastructure to store food and move it to market? That will take fuel, cement, coal, steel, copper and more. Now take that need and expand it to every emerging nation …
Disclosure: I am long TCK, BTU, SSL, NRP, PVR. We, and/or those clients for whom it is appropriate, are long TCK, BTU, SSL, NRP and PVR. And we are buying more if/as they decline in price.
Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. A retired General Officer, he spent 36 years of active and reserve military service, the first six in special operations, the next 30 in intelligence. He is professor of Global & Security Studies (Intelligence, Counterterrorism, Illicit Finance, etc.) at American Public University / American Military University. He analyzes the Big Picture first, then selects asset classes, sectors and individual securities.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice. Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund only to watch it plummet next month. We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. We take our responsibility to proffer intelligent commentary seriously, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about. © J L Shaefer 2011