North America and Western Europe have a problem…
We don’t give a damn about the rest of the world.
This is especially true when it comes to economic news.
Mainstream media dives into ham-fisted and overly speculative analysis of what the latest consumer sentiment, jobs report, or housing starts report means — and how it changes everything.
A tenth of a percent revision in U.S. GDP figures is front-page economic news, even though GDP figures are just an informed estimate, and the data being revised is from three months ago. Then we get some broad picture of all of China through GDP numbers alone with some macroeconomic analysis from a professor, wondering if the country can even maintain 7% growth…
Seven of the ten fastest growing economies are in Africa, but you’ll only hear about corruption and the rise of militant religious extremism.
This is a problem — especially for investors.
Nothing is more dangerous than becoming complacent and using outdated or incomplete information with a false sense of confidence. And if you aren’t careful, geographically-biased news will blind you to one of the biggest developments underway in the energy sector.
Pay attention only to energy news coverage in North America or Western Europe, and you’ll hear about the controversies and explosive growth of shale oil and natural gas…
You’ll hear about how solar power challenges antiquated electrical grids, and how wind farms are being tossed on massive swaths of land…
Meanwhile, the mainstream media is ignoring what’s really unfolding in the global market right now.
The King Still Reigns Supreme
You and I know all too well that fossil fuels are almost completely globalized.
Natural gas has only been cheap in North America because there is little export capacity. If there weren’t export capacity issues, nat gas would be on par with domestic gas production. Because the bottom line is, no matter how much is produced, local energy prices are dictated by worldwide distribution and demand.
When you hear or read about the demise of coal, it’s vital to realize this is a U.S.-centric story with roots in governmental red tape and a domestic glut of a cheaper fuel source.
Yes, King Coal is becoming a relic of the past in the developed world. That much we all know. We’ve heard about it ad nauseam for years now. And yes, solar and wind power are rapidly growing, and we shouldn’t ignore their potential.
However, these stories are solely focused on North America and Europe.
The greatest growth story over the next several decades is virtually ignored because it isn’t happening in First World countries.
Take a look at these charts on coal production and consumption by region:
The countries that are leading natural gas and renewable energy production have a virtual 100% market saturation for electricity. We’d be hard-pressed to consume any more energy — and we’re being forced to address efficiency and pollution to mitigate the impact of it all.
Meanwhile, there are 1.3 billion people without electricity. Even more people are rapidly consuming more power and relentlessly driving up per capita energy use.
This is especially true in Asia, where China and India need to ramp up power generation as quickly as possible to prevent widespread blackouts, public unrest, and hindered economic growth…
A little over a year ago, a power outage affected 670 million people in India — or 10% of the global population. Inadequate infrastructure and chronic power shortages were to blame.
This situation is expected to worsen over the next several years. Economic growth is constantly outpacing new power generation. South India will suffer most because it faces a 26% shortage this year. Nationwide, the power shortage is estimated at around 9%.
Whenever and wherever the power grid fails, farms, factories and small businesses are forced to close. The impact to developing countries is crippling. These countries need cheap and reliable power on an unimaginably massive scale.
China is set to build 160 new coal-fired power plants, and India will build 46 in the next four years. Overall, 1,200 coal power plants are planned worldwide, with three-quarters of them in India and China.
That is why the developing world will catapult coal to the #1 world fuel within seven years, surpassing oil for the first time since the 1960s.
90% of the worldwide increase in coal demand will come from China and India; 77% will be from China alone.
According to the Energy Information Agency (EIA), the United States is going to see domestic coal consumption drop about 14% by 2017.
How much will this offset Asian coal demand?
Hardly at all. Coal consumption is dominated by China (47%), the United States (14%), and India (9%). These three countries account for 70% of total world consumption, but their combined share of coal consumption will increase to 75% in 2040.
Just look at this map from the EIA (the latest version is actually from 2010, but it perfectly illustrates how important coal is and will be in Asia):
Headwinds and Uncertainties
China is the world’s largest producer of coal. The Middle Kingdom mined 46% of the world’s coal last year, but still had to import about 223 million tonnes to meet demand. That represents 20% of the coal it burned and a 78% year-over-year increase.
By 2016, Chinese imports are projected to reach 450 million tonnes, averaging to 50% year-to-year growth.
Water scarcity will present a major hurdle in expanding mining operations in China. More than half of the planned power plants are in arid areas that are struggling to deal with current water demand. Take a look at the Shaanxi province as an example: It accounts for 28% of coal production, yet has per capita water resources of 347 cubic meters — less than that of many Middle Eastern nations.
About half of China’s rivers have dried up since 1990, largely due to industrial demands; and the remaining rivers are heavily contaminated.
Chinese officials must therefore choose between expanding mining operations and unrest from lack of electricity and water.
Suddenly, importing coal becomes preferable.
Much of the coal China will import will come from Australia and Mongolia. However, Mongolia faces the same water scarcity issues as China. Australia is far more concerned about local pollution and Aussie mining companies face higher operating costs.
This creates an opening for American and Canadian coal miners — if they can expand exports and handle currently low coal costs. There is plenty of thermal coal in British Columbia and Wyoming’s Powder River Basin that could be sent across the Pacific.
To find an opportunity in coal, you’ll need to ignore one topic and watch another closely, although information may be hard to find…
You should ignore China’s new plan to boost environmental protection spending by 15% per year up to roughly $630 billion. Anti-coal interests have said this will crush coal demand in China. In reality, China needs far more than that just to clean up an environmental situation that even the national environmental ministry describes as “grim.”
The World Bank estimated the cost of all pollution and resource depletion in 2009 at 9% of gross national income. 9% of 2012’s GNI comes out to $697 billion — assuming things haven’t gotten worse, which is unlikely.
These new measures may make coal power more expensive by adding pollution controls, but any increase in green energy investment through these programs cannot even come close to meeting relentlessly increasing demand.
Keep an eye out for information on coal export terminals in British Columbia, Oregon, and Washington. Export facilities are inadequate, and new terminals are facing fierce opposition.
Many of the companies that could thrive with China-bound exports have seen their share prices beaten into the ground in recent years: Peabody Energy (NYSE: BTU), Arch Coal Inc. (NYSE: ACI), and Alpha Natural Resources (NYSE: ANR) are prime examples. It is also worth noting that all three have seen their share prices bounce up in the last couple months: BTU is up over 9%, and ACI and ANR are both up over 16%.
It may take some time, but keep an eye out for any announcements.
Only 3% of Powder River Basin coal production can be exported without a loss without new terminals…
If the export terminals are green-lighted, American coal will be able to tap into the biggest growth story in the energy sector for the next several decades. And investors will reap the rewards in the process.
