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6 ways to invest in the coming coal boom
Coal is plentiful and cheap, and demand is rising. Mining companies should do well, and companies that make coal-fueled generators may do even better.
By Jim Jubak
I have seen the fuel of the future.
It's not natural gas. That was the fuel of the future in 2000.
It's not uranium. That might be the fuel of the future in 2015, if the new generation of nuclear plants turns out to be as good -- once someone builds one and operates it for a while -- as their proponents hope.
It's not solar or wind or fuel cells, either. But they could give nuclear a run for its money by 2015 -- if government subsidies produce enough of a market to drive costs down further.
Nope. The fuel of the future is coal. For the next five years anyway.
My prediction is based on nothing more or less grand than this: Coal is cheap, and the coal supply is stable.
I think investors can count on coal stocks, such as Peabody Energy (BTU, news, msgs) and Arch Coal (ACI, news, msgs), to continue to outperform the stock market -- on average -- for the next five years. An even better bet, however, are the shares of the companies that make the steam turbines that allow utilities to turn coal into electricity. I'd put General Electric (GE, news, msgs), Germany's Siemens (SI, news, msgs) and France's Alstom (AOMFF, news, msgs) in that group. And, of those, Alstom would be my favorite.
Related news and commentary on MSN Money
Exactly how cheap is coal? Really, really cheap when you compare it to other fuels used to generate electricity. In December, according to investment bank Natexis Bleichroeder, U.S. coal sold for the equivalent (taking into consideration the different energy content of the two fuels) of natural gas priced at $3 to $4 per million BTUs. In December, the spot price of natural gas hit $15.50 per million British thermal units. On Jan. 19, after a month-long sell-off, natural gas sold for $8.59 per million BTUs. Even if the price of natural gas falls further -- to say, $7 per million BTUs -- coal will still be about half as expensive as natural gas.
The shift to coal builds steam
Think utilities may have noticed? Last week, GE, Siemens and Alstom, which are three of the world's big makers of turbines for electricity generation, told The Financial Times that they were seeing a shift in their orders to steam turbines for coal-fired utility plants from natural-gas turbines. According to the three, coal-powered units will make up about 40% of all orders for electricity turbines in the next 10 years, with the share for natural-gas-fired turbines falling to 25% to 30% of orders.
And this isn't just a projection. In the past year, 30% to 40% of orders for new electricity turbines were for coal-fueled generators; 20% to 30% were for gas-fired turbines.Jubak on coal
6 ways to invest: | Coal producers:
Arch Coal (ACI, news, msgs)
Consol (CNX, news, msgs)
Peabody Energy (BTU, news, msgs)
Steam turbine makers:
Alstom* (AOMFF, news, msgs)
General Electric (GE, news, msgs)
Siemens (SI, news, msgs)
* Top pick
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The projections for the next decade would be a huge shift in the market. Between 1997 and 2000, the peak of the move to natural gas for electricity generation, natural gas accounted for 60% to 70% of new electricity power plants. Coal's share was just 20% to 30%.
That shift means big growth for coal demand. The U.S. Department of Energy's Energy Information Administration projects that coal consumption in the United States will climb 73% to 1.9 billion short tons in 2030 from 1.1 billion short tons in 2004.
I think that projections of the growth in coal demand are likely to be low, too. They underestimate the appeal of stable supplies to utilities planning their next generation of projects.
Hey, if you want to believe that energy supplies are stable in a world where Russia, Iran, Venezuela, Saudi Arabia and Nigeria are major sources of energy, be my guest. Utility executives making decisions on $1 billion capital investments are having nightmares about supply disruption from sources like those. The European countries are as adamant about reducing carbon emissions as any on earth, but coal is making a comeback even there. In Germany, RWE (RWEOY, news, msgs) started construction on a 2.2 gigawatt coal plant last year.
I think there are two ways for investors to play coal as the fuel of the future: You can buy the shares of coal producers, or you can buy the shares of the companies that make coal-burning power plants.
The producers
My top three picks among coal producers are, in alphabetical order, Arch Coal, Consol (CNX, news, msgs) and Peabody Energy.
Arch Coal has the most exposure in the coal sector to improvements in pricing and supply in Wyoming's Powder River Basin. This November's sell-off among U.S. coal stocks was a result of falling prices for the low-sulfur coal produced from this region and disappointing production volumes caused by the need for repair and maintenance work at mines in the area. Powder River Basin coal prices have stabilized recently, and, with stockpiles at utilities low because of past production problems, sales growth should be healthy in 2006. Prices could well move up sharply as customers move to lock in supply for delivery in the second half of 2006, when production could again be constrained by maintenance work at the mines. A reasonable target price for December 2006 is $95 a share.
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