Posting From Stockhouse Board
WEEKLY COMMENT FOR July 24, 2006
COAL
The commodity price spiral experienced over the past 12-18 months has had a dramatic effect not only on investors but also on explorers, developers, producers, fabricators, processors, and end-users. Almost every commodity you can think of has participated.
The world is fixated with high energy prices. Will oil go to US$100 per barrel, and by when? Will natural gas prices rebound? How high will uranium prices trend?
One fuel source that received brief investor attention and then tailed off is coal. Coal is the cheapest, most abundant, and most wide-spread commodity on the planet.
The largest producers and consumers in the world are the United States, China, Australia, India, South Africa, and Russia. Current world-wide coal production is 3.0 - 3.5 billion tonnes.
In Canada, coal contributes approximately $5 billion to our economy, and employs some 55,000 - 60,000 people. It is Canada's largest single export item to Japan. The recent growth in our coal industry has resulted in major improvements to our railroads and ports.
Coal has been in use as a fuel source for more than 4,000 years, and it fostered the Industrial Revolution in Europe in the 1700s and 1800s, producing steam for engines that powered factories, trains, and ships.
Coal is the world's most abundant fossil fuel. World-wide reserves are estimated at more than one trillion tonnes, enough to last about 220 years. In contrast, at current usage, reserves of oil are estimated at 40-50 years, and natural gas at about 70 years.
As a world energy source, coal is second only to oil. Coal production usage:
(1) 70% is used to generate 40% of the world's electricity;
(2) 12% is used to make coke to produce 70% of the world's steel; and
(3) 18% is used for other industrial and domestic uses.
In Canada, approximately 20% of our electricity is generated by coal. It is being used increasingly by new electricity power plants. When the price of natural gas soared last year to over US$15 per mcf, the price of coal, the legitimate substitute, also rose dramatically, from around US$20 per ton to over US$120 per ton. Both natural gas and coal prices have declined from the highs, natural gas particularly but, even so, the cost advantage to coal is still intact. We anticipate it will remain so for the foreseeable future.
Coal stocks participated in the commodity rally with mind-boggling increases but, over the past 3-6 months, most have been clobbered and now sit at or near their 52-week lows. There have been declines of 92%, 85%, 58%, 49%, 46%, and 42% in representative Canadian coal company stocks. U.S. stocks have fared only slightly better, with stock declines of 43%, 41%, and 23% being experienced.
Is there a rebound ahead? We believe the performance of coal stocks will go hand-in-hand with those of natural gas stocks. With expectations for a narrowing of the differential between oil and natural gas, with gas going up, not oil going down, we expect there could, indeed, be a recovery in coal company stocks.
The coal industry has done much over the past 20-30 years to "clean up" its image. Dirty or inefficient coal plants have been shuttered, marginal pits have been closed, and other fossil fuels have replaced coal around the globe. But the fact remains: coal is largely holding its own. The introduction of emission reduction technology and improved environmental management have done much to improve its image. Coupled with abundant reserves, wide-spread availability, and mining cost efficiencies, coal will continue to be a significant energy source.
We are always interested in your views or comments. You can send them to suggestions@eresearch.ca
Bob Weir
Director of Research
