The Other Black Gold
"I find that a great part of the information I have, was acquired by looking up something and finding something else on the way." - Franklin P. Adams 1881-1960, American Journalist, Humorist
With natural gas prices and especially oil prices surging utility companies are increasingly firing up some of their old coal generating plants and also planning on building new ones that employ clean technologies. Coal is still the fuel of choice as approx 49-54% of the power generated in the U.S comes from coal fired power plants. We suspect that many companies will start to build new coal plants employing the new cleaner burning technologies and they will do so without giving a thought to supplies just as is the case with Nuclear power plants; then watch the price of coal soar.
Another new potential emerging use for coal is for the generation of oil; with crude oil prices soaring into the stratosphere this expensive process is now becoming more affordable. Since the U.S has one of the largest reserves of coal embracing this technology could significantly reduce our dependence on foreign oil.
Electricity demand in the U.S has been skyrocketing and coal fired plants have been responsible for providing over 64% of this from 1980 to 2001; demand is projected to increase an additional 45% by 2025. The United States will consume over 5770 billion KWh in 2025. Even though the focus has been on Nuclear power plants recently we feel that there is more then enough room for new coal fired plants. First of all they are cheaper to build and secondly one does not have to deal with radioactive waste materials though ironically coal fired power plants actually emit more radioactive materials then nuclear Power plants; that is a totally separate topic and beyond the scope of this discussion. The most important factor is that the United States has huge supplies of coal and does not have to run the risk of being held at ransom or competing with other countries for uranium supplies. Currently uranium demand exceeds supplies by 50%; imagine what is going to happen when all those new nuclear plants come online.
In 2025 it's estimated that the U.S will consume in excess of 5770 billion KWh, 2,890 of those will be provided by coal. As of 2004 coal was responsible for generating 1974 Billion KWh of electricity so this represents a whopping 46% increase.
The U.S holds the World's largest coal deposits; at the present rate of consumption they could last between 200-250 years. These supplies also are nicely spread across the entire U.S. and for the most part are pretty close to major sources of transportation. Thus getting these supplies to the market place is not a problem. Coal currently accounts for 49-54%of the power supply production; in 2030 that share is expected to increase to 57%. Before jumping up and saying well that only represents a 3-7% jump, one must understand that power consumption is projected to increase by 33% if not more by 2030.
In 1980 569 million tons of coal was used to generate electricity; in 2001 we used 966 million tons, a 70% increase. Demand has been increasing exponentially. Currently we are using in excess of a one billion tones a year; imagine what we will be using in 2030. To produce the same amount of electricity that coal generates today we would need to build an additional 25 nuclear plants. Hence it goes without saying that nuclear energy alone will not be sufficient to tackle the current problem.
Some interesting factors
154 new plants are in the drawing boards of over 42 states. TXU a Dallas based company alone is planning on building over 16 new plants. The interesting part is that most coal mines have cut back on production and or have closed many of their mines down due to current prices. Hence once again we have an anomaly in place, huge demand looming in the near future and on the supply side we have cut backs. This is somewhat reminiscent of the Uranium/nuclear power plant situation. New coal power plants are just not constructed overnight. Markets always look into the future the price of coal will start to rise in anticipation of all these new coal plants coming online; this is exactly what's happening in the Uranium sector right now.
So far we have only dealt with the United States but when one factors in countries such as India and China things look even brighter for this black filthy material. India and China both have a new emerging middle class to deal with. Every year more and more individuals are added to this segment of the population and they all thirst for the simple assets we take for granted. All this means that the demand for energy continues to sky rocket and even though both nations are embracing nuclear energy it's simply not going to be enough. This is why both of them have embraced coal even though it is going to produce a lot of pollution because they are stuck between a hard place and rock. As is the case with all governments they want the fastest possible solution. Once they have fixed the current problem then they will attempt to deal with the problem of pollution. Given that both these countries are just at the early stages of expansion one can rest assured that demand for the other black Gold is not going to ease anytime soon. If anything we think it's simply going to increase. China has now surpassed the United States as the largest user of coal consuming in excess of a billion tones per year.
We also have what we would like to call an inter market positive divergence here; demand for coal is going to increase significantly yet many mines are actually closing operations to cut down on costs. When demand suddenly starts to increase and supplies cannot keep up, coal prices could start to move upwards rather fast. We already have two plays in the coal sector ###and ###. We are currently monitoring several other stocks in this sector and waiting for them to issue a buy signal on our indicators.
Natural gas has already mounted a nice rally if one looks at a 6 year chart and its getting ready to trade even higher. After natural gas starts trading in the 12-15 dollar ranges for a significant period of time and trade here it will in the not to distant future. Then watch the media suddenly shift is attention to coal and by this time the smart trader should already have taken his or her positions. Once the media starts to focus attention on a sector usually the first stage of easy money is over and done; the next stage of a painful correction followed by a massive rally start to take shape (most of the small players sell during the painful correction stage and miss out on the next massive rally). We believe in the future coal will start to be referred to as the other black gold. It's for this reason we have a position in this sector and are looking to slowly add more.
"Growth for the sake of growth is the ideology of the cancer cell." - Edward Abbey 1927-1989, American Writer
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