From -
Energy and CapitalCOAL
According to the EIA, the rising level of exports reached its highest
level since 1998 last year because supply in the world's
fastest-growing economies has been limited, and the falling dollar has
made it more attractively priced. Russia has halted its exports of
metallurgical coal to satisfy its own needs, and Australia, the
world's largest exporter of coal, has faced shipping delays. Global
coal demand growth is primarily driven by the steelmaking industries
of Asia and South America (particularly Brazil), and by the power
plant needs of China. China is both the world's largest producer and
consumer of coal, making it also the world's greatest producer of
greenhouse gas emissions, and became a net importer last year.
The growth in U.S. coal imports, while less dramatic than exports, has
been driven by relatively flat domestic production, as shown in the
following chart. This caused power plant operators to draw down their
inventories (which had been at an historic high) and to seek coal from
abroad.
Having enjoyed two years of rocketing growth in their share prices
from 2004-mid 2006, the stocks of major coal producers such as Peabody
Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) have moderated (with some
notable price spikes) and now stand about where they were at the
beginning of 2006. In part, this may be a reflection of the Street's
growing concern about the future of coal usage in the face of
increasing public pressure to control greenhouse gases.
While I enjoyed some nice gains from the coal producers during their
run-up, I have remained mostly out of the sector for the last two
years. There are occasional opportunities to make a quick 20% on the
price spikes of these shares, but timing them is tricky, and the
greenhouse gas issue adds a level of risk I'm not quite comfortable with.
More to the point, growth in domestic coal demand is primarily driven
by electricity generation, which has grown very steadily.
However, the political climate is strongly in favor of meeting that
growing need from renewables, rather than coal. Indeed, recently
introduced legislation threatens to put the kibosh on new coal-fired
power plants entirely unless they employ carbon emissions control
systems. While coal-consuming power operators have been quick to point
out that the technology exists, they have been so far unwilling to
deploy it, citing cost concerns.
RENEWABLE
In stark contrast to the increasingly discouraging outlook for the
production of fossil fuels, renewables have been on an absolute tear.
The global solar industry has been growing at nearly 50% per year
since 2002, effectively doubling global production every two years.
The global market now stands at about $11 billion, with 12,400 MW of
deployed capacity. In part, this amazing growth is due to increasing
incentive programs, which are succeeding in driving costs down to the
point where parity with coal-fired grid power is expected within the
new few years.
Likewise, wind power has been growing at the rate of about 25% per
year worldwide in recent years. Since 1990, wind generating capacity
has doubled roughly every three and a half years. Wind power is
already cheaper than power from natural gas, coal and nuclear plants
in most cases, ensuring its continued growth. Global wind capacity
currently stands at about 94 GW.
Although they are nascent technologies, geothermal and marine energy
systems are quickly gaining ground as well, thanks to growing R&D
budgets funded by the First World in pursuit of emissions-free power.
The trends are exactly as we have predicted: the cost of traditional
fossil fuels is going up, and the cost of renewables is going down. We
see no reason to expect those trends to change any time soon.
On the whole, investing in energy for the long term is a no-brainer,
as long as the world's developing economies keep chugging along. The
slowing demand of the First World isn't going to stop this train.
