Coal May Surpass Oil as Better Bet on D (1 Rating) 31-Jul-06 06:18 am Coal May Surpass Oil as Better Bet on Demand for Cheaper Fuel
July 31 (Bloomberg) -- Coal, the hard, black byproduct of fossilized plants used as fuel since China's Western Han dynasty 2000 years ago, may overtake oil as the best performing energy investment.
That, at least, is the emerging consensus from a diversity of speculators, investors and giant corporations including Wilbur Ross, the billionaire bankruptcy specialist, BHP Billiton Plc, the world's largest mining company, and Merrill Lynch & Co., the third-largest U.S. securities firm.
Because ``coal is the cheapest, most abundant energy source,'' from North America to China, ``the surge in oil has encouraged people to plan new coal-fueled power plants and to start using conversion technologies such as coal-to-diesel,'' said Richard Price, an investment banker at Westminster Securities in St. Louis.
Coal is poised to top its recent highs because of record oil and natural-gas prices, said Francisco Blanch, chief commodity analyst at Merrill Lynch & Co. in London. In Europe, coal was $62.55 a ton last week and reached a 10-month high of $66.83 in March, broker ICAP said. Prices paid by U.S. utilities will climb 5 percent in the next year and double by 2021, said Price, a former vice president at Peabody Energy Corp., the largest U.S. coal producer.
Converting coal into liquid fuel or natural gas becomes economical when oil remains above $40 a barrel, said Stephen Leer, chief executive officer of Arch Coal Inc., the second- largest U.S. producer.
Oil more than doubled since January 2004, reaching a record $78.40 a barrel on July 14 and averaging $68 in New York this year. It hasn't traded below $40 since June 2004 and will fall 19 percent next year to $60, according to the median forecast of 19 analysts surveyed by Bloomberg.
Coal Turnaround
Ross, the 68-year-old chairman of International Coal Group Inc., is convinced the search for a cheaper alternative to oil and natural gas will enable coal to outperform oil. ``We certainly bet on that,'' Ross said in a telephone interview from Paris.
``The argument against it is not an economic one,'' he said. ``It's about the environment and emissions.'' Ross, who was worth about $1 billion last year, according to Forbes magazine, made much of his fortune transforming troubled companies into money makers. He founded Ashland, Kentucky-based International Coal in 2004 after acquiring mines from bankrupt producers.
Coal in the U.S. is forecast by analysts to recover from a drop this year caused mainly by a mild winter. Prices in Wyoming's Powder River Basin, the largest U.S. producing region, have fallen from a record $21.50 a ton at the end of last year to $11.50, according to data compiled by Bloomberg, while the eastern coal benchmark has declined 15 percent to $49 a ton.
Acquiring Reserves
For the U.S. and China, the world's biggest energy users, coal offers the chance of reducing their reliance on Middle East oil that has tripled in cost since 2002. The U.S. has enough coal to last almost two centuries and today imports two-thirds of the oil it uses.
Coal producers are acquiring reserves after the U.S. government estimated demand will increase by 3 percent a year, almost twice the rate for oil. St. Louis-based Peabody Energy on July 5 offered A$1.83 billion ($1.4 billion) for Excel Coal Ltd., Australia's third-biggest coal producer.
``A lot of the future energy requirements globally will have to be satisfied by coal,'' said Michael Schroder, head of resources at Old Mutual Asset Management in Cape Town, which manages the equivalent of $55 billion, including shares in mining companies BHP Billiton and Anglo American Plc. ``Coal seems to be on the agenda of lots of countries.''
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