Investing in coal
Nick Louth
Published : Mon 04 Sep, 2006
How will you heat your home or fuel your car 10 years
from now? The North Sea is running out of oil and gas.
Global oil reserves are dwindling. Most of what remains
sits beneath unstable countries in the Middle East.
There is plenty of natural gas in Russia and Central
Asia. But how secure is Britain's supply now the Kremlin
can turn the taps off at will? Alternative energy, for
all its promise, faces costly development and planning
problems. And how can we return to nuclear power when no
one has worked out where to dispose of the waste, nor
how much it will cost?
Yet while the world frets about oil and gas supplies,
the answer to Britain's energy problem may be literally
underneath our feet.
Coal, lying in thick and sometimes untouched seams, is
present in just those countries which need it. There is
enough in proven reserves to last the world 164 years at
current rates of use. Natural gas will last perhaps 67
years at most. Proven oil reserves will last only 41
years, perhaps less now that China and India are getting
rid of their bicycles and starting to drive cars just
like we do.
Few people in Britain these days use coal at home,
however. Only the oldest power stations run on it. Coal
is still seen as old-fashioned, dirty, a stain on the
environment, a byword for industrial accidents and
industrial strife. Britain's deep coal mines were
"uneconomic" in the words of Mrs Thatcher. Yet now, 20
years after the British deep-mined coal industry was
dragged like a cantankerous old horse to the knacker's
yard, coal has a future again.
Coal may forever be associated with dirt and grime. But
huge progress has been made in making it no worse for
the environment than other fuels. Modern techniques
include washing it and sorting out impurities before the
coal is pulverised. Once the fuel is burned, the sulphur
dioxide gases it releases (and which cause acid rain)
are removed through special units installed within
cooling towers.
These "wet scrubbers" spray a mixture of limestone
powder and water into the hot gases. By a chemical
reaction this produces a dust, which then falls within
the chimney. It is then collected and used for making
builder's plaster.
More dust is removed by giving it an electrical charge –
rather like static on nylon clothing. This attracts the
dirt onto special plates. Overall, modern clean coal
technology can remove 99% of pollutants.
This is not to say that coal is clean everywhere it's
used. Far from it. China's huge coal industry is as
Dickensian as anything seen during Britain's industrial
revolution, and not just because of the pollution caused
by its aged plants. China produces 35% of the world's
coal, but it accounts for 80% of its mining deaths. More
than 7,000 miners die in China each year, and the figure
is only gradually falling.
Globally, coal is used in power generation and steel
manufacture, particularly in China and India. Their
generators and mills demand high quality foreign coking
coal in particular. But the adaptability of coal,
largely forgotten in recent decades, is also being
explored anew, because of its newly-found
competitiveness. For investors, this offers huge
potential. Coal is dramatically underpriced compared
with competing fuels like natural gas, whose price moves
up in line with oil.
Compare the market value of Peabody Coal (the world's
largest coal firm) with ExxonMobil (the biggest oil
firm) in terms of the energy value of what they own. The
price of Exxon's proven oil reserves are $3.16 per
million British thermal units. The equivalent coal
deposits at Peabody are worth just 7 cents per million
BTU. That's barely more than 2% of the value of oil!
Such an enormous discrepancy has spurred new
technologies that allow us to substitute coal for oil
and natural gas. But some coal-fuel processes are 60
years old and more. The Nazi war machine made use of
synthetic fuel derived from coal. And before the advent
of the North Sea fields in the mid-70s, we all used coal
gas for domestic heating and cooking.
If oil prices remain above the critical threshold of $50
per barrel, there's even a good chance we will soon be
flying in coal-powered airliners. Indeed, if you have
flown from Johannesburg International Airport in the
last seven years, your aircraft ran on a mixture of
kerosene and liquidised, pulverised coal.
Coal-rich and oil-poor, South Africa became a pioneer of
this work during the apartheid era. Sanctions blocked
imports of oil, but it required transport fuel at any
cost. Now Sasol, the South African chemical firm that
leads the world in coal-oil production, is to offer a
new version of its aviation fuel, 100% derived from
coal, for international approval later this year.
Soaring oil prices now mean the rest of the world is
getting interested, too. The US Air Force spends $4.5bn
a year on jet fuel, and is already showing interest.
Defence Secretary Donald Rumsfeld, recognising that many
USAF scenarios involve bombing its own traditional oil
suppliers in the Middle East, has ordered his forces to
explore alternative fuels that don't require foreign
oil. In September the USAF will conduct its first test
flight with a synthetic fuel derived from natural gas,
using technology similar to coal-to-oil.
Coal markets are fragmented by quality and locality. But
it is clear that global coal prices have been rising for
years. Since 1997, steam coal used for power generation
has risen by 30% to $35 a tonne in the US. Over the same
period, however, oil and natural gas prices have
quadrupled. So coal is now increasingly competitive for
electricity generation.
Growth in demand has had knock-on effects in hitherto
declining industries too, stoking a resurgence in
railway freight, shipping and ports. This is not likely
to prove a flash in the pan. Coal prices are expected to
double by 2020.
Outside Britain, demand for coal is growing fast. Every
two years, according to the International Energy Agency,
China is adding more power generation capacity than
France has in total. About 70% is coal fired. China's
steel boom is also being powered by high quality coking
coal, though much of this comes from abroad.
Britain's coal industry, however, may play Cinderella
during this party. Although we have 220 million tonnes
of proven coal reserves, enough to last many decades,
the main issue is getting at it.
Open cast digging, the method of choice in the vast
spaces of Australia, Canada and much of the US is an
impossibility in the UK. On planning grounds alone,
deep-mined coal is hamstrung, too. But it also suffers
from decades of neglect and a lack of miners. With few
exceptions, it will remain easier and cheaper for UK
power stations to import foreign open-cast coal than for
us to reopen flooded and abandoned mines.
One of those exceptions is Richard Budge, the mining
entrepreneur once known as "King Coal". He plans to
reopen the Hatfield Colliery in South Yorkshire next
May. Budge is the former head of RJB Mining, now known
as UK Coal. It took over the rump of the British coal
industry after privatisation in 1994.
Oil prices don't have to remain in the $70-$80 band for
coal to have a future. With its new clean image and
increasing adaptability, coal is going to muscle in so
long as oil prices remain above $50. With no
geopolitical risk, and increasingly attractive
economics, there is huge potential in coal.
Regards,
Nick Louth
for The Daily Reckoning
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