Coal - where to now?

As you may have seen, coal stocks have been hammered recently (EXL,CEY,MCC...) because of big drops in price of coal.

But just possibly, could good old booring coal be the next boom commodity?

China is looking at 'liquefying' coal, to act as an oil replacement.

http://www.globalcoal.com/news/coalnews.cfm

While U is booming ATM, the problem is that U is only used to create electricity (on any meaningful scale). But electricity is basically not storable in significant quantities, so is not much good for mobile needs (cars, trucks etc). That is why petrol (oil) is vital to the economy.

But if in future years, a liquid energy source can be obtained from coal, coal COULD go through the roof.

I like EXL for a pure coal play (don't own any ATM). SRL probably better as it is a diversified miner and has other interests.

Good Argument Markrmau.
Could be a good reason why oil price is deflating.
I fear that the price of coal will explode.
Coal mine stocks are behaving very peculiar. Won`t be surprised for a breakout.
Cheers from Germany

markrmau said:

As you may have seen, coal stocks have been hammered recently (EXL,CEY,MCC...) because of big drops in price of coal.

But just possibly, could good old booring coal be the next boom commodity?

China is looking at 'liquefying' coal, to act as an oil replacement.

http://www.globalcoal.com/news/coalnews.cfm

While U is booming ATM, the problem is that U is only used to create electricity (on any meaningful scale). But electricity is basically not storable in significant quantities, so is not much good for mobile needs (cars, trucks etc). That is why petrol (oil) is vital to the economy.

But if in future years, a liquid energy source can be obtained from coal, coal COULD go through the roof.

I like EXL for a pure coal play (don't own any ATM). SRL probably better as it is a diversified miner and has other interests.

Click to expand...

Hi yeah i like EXL too, dont have any yet, ir dropped a bit more today due to an annoucement of increase costs

However if u look at the Forecasts (comsec), they seem very good even despite drop in Coal Prices/SP? Forecast EPS for 2008 is 136.5c? thats a PE of under 5 using current SP? Nice dividends too

EPS(c) PE Growth
Year Ending 30-06-06 70.2 9.1 42.3%
Year Ending 30-06-07 117.7 5.4 67.7%

Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS 49.3 70.2 117.7 136.5
DPS 24.0 35.0 49.0 70.5

Thoughts anyone?

Thanks

MS

I have quite a few EXL bought May 04 at $2.20, and, despite present lowered SP, am happy to be holding for a recovery: regard it as a long term stock.

Julia

Julia said:

I have quite a few EXL bought May 04 at $2.20, and, despite present lowered SP, am happy to be holding for a recovery: regard it as a long term stock.

Julia

Click to expand...

HI Julia, there are 2 stocks that u bought low on, GTP and EXL

At current prices, which woudl you favour more and why? Both stocks have dropped a bit this yr

thx

MS

exl quarterly out 2day...

looks good 2 me, market doesnt seem 2 think so...

maybe a buying opportunity?

To contradict my earlier post, I sold all my EXL a couple of weeks ago. The stock had done pretty well for me (bought at $2.20), it was down more than $2 off its high and the chart showed a continuous descent. Happy to take my profits and go. Since then the price has been erratic. I'm happy to be out for now - there's just too much uncertainty about coal prices for me at present.

Michael: really wouldn't like to compare GTP and EXL. I've sold some of my GTP and, although I believe the fundamentals for GTP in the longer term are excellent, I'll sell more at the annual peak of May/June if not before, not because of any unhappiness with the company but just because I'm overweight in this stock.

Julia

Julia said:

To contradict my earlier post, I sold all my EXL a couple of weeks ago. The stock had done pretty well for me (bought at $2.20), it was down more than $2 off its high and the chart showed a continuous descent. Happy to take my profits and go. Since then the price has been erratic. I'm happy to be out for now - there's just too much uncertainty about coal prices for me at present.

Michael: really wouldn't like to compare GTP and EXL. I've sold some of my GTP and, although I believe the fundamentals for GTP in the longer term are excellent, I'll sell more at the annual peak of May/June if not before, not because of any unhappiness with the company but just because I'm overweight in this stock.

Julia

Click to expand...

Hi Julia

ok thx, when u say "overweight" does that mean u have to much in your portfolio?

Also GTP u say there is an annual peak May/June GTP? Do you know why?

EXL MCC CEY GCL, yeah very unstable atm, hard to say which way it will go

Thanks

MS

Hi Michael,

Yes - overweight means exactly that. It happened for a number of reasons which are not relevant here. I don't mind being similarly overweight in, e.g., some of the banking stocks, but am not comfortable when it's something as volatile as GTP

Re the annual peak. This occurs when there is heavy buying of the various "Trees" managed invesment schemes (buying of the tree lots themselves) because of the tax advantages for the end of the financial year. The perception of the extra renenue/profit to the company seems to carry through to the SP.

Regards

Julia

Julia said:

Hi Michael,

Yes - overweight means exactly that. It happened for a number of reasons which are not relevant here. I don't mind being similarly overweight in, e.g., some of the banking stocks, but am not comfortable when it's something as volatile as GTP

Re the annual peak. This occurs when there is heavy buying of the various "Trees" managed invesment schemes (buying of the tree lots themselves) because of the tax advantages for the end of the financial year. The perception of the extra renenue/profit to the company seems to carry through to the SP.

Regards

Julia

Click to expand...

hey julia

u mean all companies generally experience sp peaks at end of financial yr? do u mean our financial year (30 June) or like the specific companies' end of financial yr eg. MBL end of financial yr is 31st March and they report mid-May.

Nizar:

No, I do not mean that all companies experience peaks at the end of the financial year (30 June).

If you look back through the thread on GTP (rather than get off track on the "Coal" thread, you will probably find several posts on the special situation regarding not only GTP but other companies who have MIS (managed investments schemes) which are mostly bought for their tax advantages.

Julia

Nizar:

No, I do not mean that all companies experience peaks at the end of the financial year (30 June).

If you look back through the thread on GTP (rather than get off track on the "Coal" thread), you will probably find several posts on the special situation regarding not only GTP but other companies who have MIS (managed investments schemes) which are mostly bought for their tax advantages.

Julia

Some non-financial background info on coal for those who are interested... Ignore this if you're only interested in price charts etc.

As a rough guide, there's the same energy (heat) content in a metric tonne of export grade (thermal) black coal as there is in 4.4 barrels of crude oil. That will vary a bit depending on the grade of coal and source of oil.

Coal ranges from lignite (brown coal) to sub-bituminous to black to anthracite. There are various sub categories within those groups. Actual mining in Australia for black coal (the common exportable grade) takes place mostly in Qld and NSW and on a much smaller scale in WA where it's used locally in industry and power stations. Australia's coal exports originate from Qld and NSW. Vic (lignite), SA (a rather unique type of sub-bituminous coal) and Tas (sub-bituminous) do not produce coal suitable for export. Production in those states is used locally for power generation (Vic, SA) and heavy industry, particularly paper mills and cement works (Tas). Coal is not mined in the NT.

The main way that coal competes with other fuels is for the generation of electricity. In Australia, about 80% of all electricity is produced from coal. About 10% comes from hydro (60% of that in Tas) and the rest is mostly from natural gas (WA and SA dominate gas consumption for electricity generation but it's used in all states and supplies 95% of total generation in NT). Small amounts of oil are used for startup of coal-fired plant, in isolated communities and for peak power generation to the main grid.

Internationally, coal is far less dominant but is still by far the most important resource used for electricity generation. The major international sources are coal, nuclear, hydro, gas and oil in that order. There is significant room for coal to grow at the expense of nuclear and/or gas.

In the USA it's coal, nuclear, gas, hydro, oil in that order. In the UK it's gas, coal, nuclear and small amounts of various others (oil, renewables) in that order. In New Zealand it's hydro, gas/coal (there's significant switching between the two according to availability), geothermal and oil in that order.

Oil tends to be used mostly for peaking plants or as backup and in general it would not be economic to construct new coal-fired plant for this purpose unless the oil price really does head to the moon. New Zealand just built a new oil-fired plant solely for backup use. Coal and particularly gas-fired plants often use oil as a backup when the primary fuel source is in short supply. Various gas-fired plants in Australia do this from time to time.

Existing hydro plants have virtually zero cost and thus aren't likely to be prematurely replaced and they have long lives. Typically they're designed for a minimum life of 70-90 years although for most plants they ought to survive far longer than that with proper maintenance. There's quite a few 100+ year old hydro plants still fully operational with the original machinery.

Non-hydro renewable energy sources aren't a serious contender as a replacement for conventional power sources at the present time. They are, however, a clean and useful supplement in many cases.

So in practice it's coal versus nuclear versus gas. As gas becomes expensive (far too expensive for economic power generation in US and UK now) it comes back to nuclear versus coal and that is more a question of politics than anything else.

If coal liquefaction ever gets off the ground in a big way then that would certainly increase coal demand. However, much of the interest so far is in using low grade brown coal rather than black coal. Various plants have been proposed in Victoria and New Zealand amongst other places. In my opinion there won't be serious demand for black coal as a feedstock for "oil" production in the next 10 years as there simply isn't anywhere near sufficient investment being made to build the necessary liquefaction plants on sufficient scale. That doesn't mean there will be no demand for coal for that purpose though.

Coal is also relatively abundant comapred to oil and it's still very easy to increase coal production. No different to any other mineral apart from oil/gas in that sense. It lacks genuine scarcity. Of course that doesn't preclude a bull market, but it lacks the sort of scarcity which leads to wars etc.

This post for info only. I have intentionally not drawn any conclusions regarding price. Think about it and reach your own conclusions.

Hi Smurf
Thanks for a really informative and interesting post. Would you say what happens from here in terms of choices of energy supply etc. is more politically determined than anything else?

Julia

Smurf1976 said:

Some non-financial background info on coal for those who are interested... Ignore this if you're only interested in price charts etc.

As a rough guide, there's the same energy (heat) content in a metric tonne of export grade (thermal) black coal as there is in 4.4 barrels of crude oil. That will vary a bit depending on the grade of coal and source of oil.

Coal ranges from lignite (brown coal) to sub-bituminous to black to anthracite. There are various sub categories within those groups. Actual mining in Australia for black coal (the common exportable grade) takes place mostly in Qld and NSW and on a much smaller scale in WA where it's used locally in industry and power stations. Australia's coal exports originate from Qld and NSW. Vic (lignite), SA (a rather unique type of sub-bituminous coal) and Tas (sub-bituminous) do not produce coal suitable for export. Production in those states is used locally for power generation (Vic, SA) and heavy industry, particularly paper mills and cement works (Tas). Coal is not mined in the NT.

The main way that coal competes with other fuels is for the generation of electricity. In Australia, about 80% of all electricity is produced from coal. About 10% comes from hydro (60% of that in Tas) and the rest is mostly from natural gas (WA and SA dominate gas consumption for electricity generation but it's used in all states and supplies 95% of total generation in NT). Small amounts of oil are used for startup of coal-fired plant, in isolated communities and for peak power generation to the main grid.

Internationally, coal is far less dominant but is still by far the most important resource used for electricity generation. The major international sources are coal, nuclear, hydro, gas and oil in that order. There is significant room for coal to grow at the expense of nuclear and/or gas.

In the USA it's coal, nuclear, gas, hydro, oil in that order. In the UK it's gas, coal, nuclear and small amounts of various others (oil, renewables) in that order. In New Zealand it's hydro, gas/coal (there's significant switching between the two according to availability), geothermal and oil in that order.

Oil tends to be used mostly for peaking plants or as backup and in general it would not be economic to construct new coal-fired plant for this purpose unless the oil price really does head to the moon. New Zealand just built a new oil-fired plant solely for backup use. Coal and particularly gas-fired plants often use oil as a backup when the primary fuel source is in short supply. Various gas-fired plants in Australia do this from time to time.

Existing hydro plants have virtually zero cost and thus aren't likely to be prematurely replaced and they have long lives. Typically they're designed for a minimum life of 70-90 years although for most plants they ought to survive far longer than that with proper maintenance. There's quite a few 100+ year old hydro plants still fully operational with the original machinery.

Non-hydro renewable energy sources aren't a serious contender as a replacement for conventional power sources at the present time. They are, however, a clean and useful supplement in many cases.

So in practice it's coal versus nuclear versus gas. As gas becomes expensive (far too expensive for economic power generation in US and UK now) it comes back to nuclear versus coal and that is more a question of politics than anything else.

If coal liquefaction ever gets off the ground in a big way then that would certainly increase coal demand. However, much of the interest so far is in using low grade brown coal rather than black coal. Various plants have been proposed in Victoria and New Zealand amongst other places. In my opinion there won't be serious demand for black coal as a feedstock for "oil" production in the next 10 years as there simply isn't anywhere near sufficient investment being made to build the necessary liquefaction plants on sufficient scale. That doesn't mean there will be no demand for coal for that purpose though.

Coal is also relatively abundant comapred to oil and it's still very easy to increase coal production. No different to any other mineral apart from oil/gas in that sense. It lacks genuine scarcity. Of course that doesn't preclude a bull market, but it lacks the sort of scarcity which leads to wars etc.

This post for info only. I have intentionally not drawn any conclusions regarding price. Think about it and reach your own conclusions.

Click to expand...

Hi Smurf thx!

Btw do u knwo why there was a surge in Coal Prices prior in 2004, thus the rise of EXL, MCC, CEY, GCL (before they dropped in 2005)?

MS

2005 was of course a boom year for coal because of the high request of coal for growing china and the japanese steel mills. There are a few factors to keep in mind when dealing coal. First of all coal is handled with US dollars. And so long the dollar is weak, there is a stagnation in the rise of value of stock. If you anlayze all 4 securities (EXL, MCC, CEY, GCL), they all have been having trouble in the past year. I would define such a behaviour as a correction in price ( as the old Kostolany used to put it).
Of course china has been active in obtaining commodities of its own but IOP it will never be able to obtain sufficient coal for there factories, which are situated in the east. There coal mines are unfortunately situated in the west and transportation to the mills is utterly expensive. Its cheaper for them to ship it out of australia.
I am expecting a stronger US dollar this year which will force the price of oil to stagnate. IOP it is already happening. Paying oil in US dollars means inflation with an expensive greenback. Consequentially commodities like coal will sky-rocket for a while...and then we`ll see...

excalibur said:

2005 was of course a boom year for coal because of the high request of coal for growing china and the japanese steel mills. There are a few factors to keep in mind when dealing coal. First of all coal is handled with US dollars. And so long the dollar is weak, there is a stagnation in the rise of value of stock. If you anlayze all 4 securities (EXL, MCC, CEY, GCL), they all have been having trouble in the past year. I would define such a behaviour as a correction in price ( as the old Kostolany used to put it).
Of course china has been active in obtaining commodities of its own but IOP it will never be able to obtain sufficient coal for there factories, which are situated in the east. There coal mines are unfortunately situated in the west and transportation to the mills is utterly expensive. Its cheaper for them to ship it out of australia.
I am expecting a stronger US dollar this year which will force the price of oil to stagnate. IOP it is already happening. Paying oil in US dollars means inflation with an expensive greenback. Consequentially commodities like coal will sky-rocket for a while...and then we`ll see...

Click to expand...

Hey i agree with u, btw what does IOP mean?

Yeah bascially if costs are high as experienced by some of our coalers, then they would naturally demand higher prices. Coal although "dirty" is relatively cheap and still very efficient when compared to crude

Which Coal Stocks do u think will perform better at current prices out of EXL, MCC, CEY, GCL, FLX, RSP, other?

thx

MS

michael_selway said:

Coal although "dirty" is relatively cheap and still very efficient when compared to crude

Click to expand...

This is a non-financial post relating to the above for those who may be interested.

In terms of the end uses, primarily electricity generation, steel production and to a lesser extent cement kilns and factory boilers (eg paper mills), coal isn't particularly "dirty" compared to crude oil in the traditional sense. And traditional steel production is based on coke (from coal) anyway so oil isn't a direct substitute there.

Coal emits approximately 20% more carbon dioxide (greenhouse gas) when used at the same efficiency level in electricity generation (steam turbine plant). But carbon dioxide is a non-conventional pollutant in that it has no local effects in practice.

Conventional pollutants (air pollution) are particulates (visible smoke), oxides of nitrogen, hydrocarbons (unburnt fuel) carbon monoxide (a colourless, odourless toxic gas commonly associated with car exhaust) and sulphur dioxide (acidic gas which causes acid rain). In the context of large scale industrial use with typical (relatively cheap) pollution controls it's only the sulphur dioxide that is relevant unless the local climate results in an accumulation of oxides of nitrogen (leading to smog formation) or there is some ultra-sensitivity on the issue (not likely in China).

Australian coal is generally low in sulphur - hence why there has never been an effort to limit emissions from Australian coal-fired power stations since it's just not a problem in practice. UK (and elsewhere) coal is significantly higher in sulphur content which is the reason for it having caused problems overseas.

Crude oil also contains very significant amounts of sulphur. Very little of this makes its way through to petrol or diesel (it's removed at the refinery in a rather expensive process - that's why truck emissions are much cleaner now than even 5 years ago). The limits in Australia and other countries for sulphur content in petrol and diesel have been progressively reduced and are at the point now where there's little difference in the overall impact of heavy vehicles (eg buses) running on diesel versus natural gas. Different pollutants but overall not a great difference.

Heavy fuel oil is, however, another matter. It contains typically 1 to 4% sulphur and, outside of Japan, oil-fired power stations generally don't have any controls on sulphur dioxide (SO2) emissions (significant amounts of unrefined crude oil are burned in Japanese power stations in addition to fuel oil). It goes straight up the stack. For example, the then oil-fired (now gas fired) Bell Bay power station in Tasmania emitted more sulphur dioxide than the much larger coal-fired stations in the mainland states. Not more per unit of production, but more in total despite being less than one sixth the size of Hazelwood PS (Vic). No longer an issue but there was sufficient concern for Hydro to do fallout monitoring when the plant was running (infrequently - it's backup to hydro in the event of severe drought or breakdown) and the sulphur issue was a key one in favour of conversion to another fuel when permanent operation was first contemplated (cost being another issue).

EU regulations limit sulphur in fuel oil consumed in power stations to 1%. Some other countries also have similar regulations but only in Japan do oil-fired power stations have effective emissions controls (due to their location in the metro area of major cities). Even with the EU limit, Australian coal is no worse and generally cleaner (even without emission controls). That said, the 4% sulphur fuel is still going somewhere but it sells at a discount to the lower sulphur grades. Australian limits vary somewhat - 0.05% (ridiculously expensive but it's only backup to natural gas to run the plant) from memory at Newport PS (Melbourne metro area) and it was limited to 3% at Bell Bay (typically 2.5% was used in practice). There's crude oil being produced which contains 6% and even 8% sulphur.

At considerable expense (and consumption of limited limestone resources) sulphur emissions can be reduced to very low levels from either coal or oil-fired plant. It's a question of cost (it's no secret that at least one very large UK coal-fired plant switches the SO2 scrubbers off at night...).

Coal-fired power stations also emit significant quantities of other pollutants not mentioned above, likewise oil. Nickel and vanadium are among the more significant ones in the case of oil (vanadium being linked with asthma with health effects having been observed in some countries (notably UK)) and coal emits mercury (in fact it's the largest source worldwide).

Modern ultra-supercritical coal fired plant operates at higher efficiency and produces less of all major pollutants due to less coal being used. Such plants exist in Queensland (only the newest plants) in Australia. Other options are fluidised bed combustion (virtually zero visible emissions even without gas scrubbers) and the big goal is to make integrated combined-cycle gassification (IGCC) viable - literally using the coal as gas with the resultant clean emissions.

In short, Australian coal is clean enough to meet emissions requirements, especially if SO2 scrubbers are used. It's cleaner than oil (likewise coal from some other countries) and vastly cheaper. The exception is greenhouse gas emissions but (waiting to be flamed here ) I can assure you that the world as a whole is NOT doing anything meaningful to reduce emissions, in fact they will increase. The Kyoto Protocol is a cause of net increases in emissions due to the accelerated economic growth it encourages in non-target (no emissions limits) countries particularly China - a fact that's reasonably well understood. That is, shift manufacturing away from Kyoto countries thus boosting the economy and consumer demand in non-Kyoto countries.

The coal industry responded to the news that Kyoto was to be ratified by announcing mine and port expansions whilst the nuclear industry was likewise rather happy. More nuclear power in the developed countries, more coal demand in the developing countries and in total. It's more of an economic plan to boost the global (but not developed countries) economy than an environmental agreement. Politics... Worth noting that many countries that are required to meet targets under Kyoto are already well above target emissions and seem unlikely to meet their target levels. They forgot about natural gas depletion with the UK government in particular now acknowledging that coal is part of the future whereas just 2 years ago they absolutely opposed it.

michael_selway said:

Hey i agree with u, btw what does IOP mean?


Which Coal Stocks do u think will perform better at current prices out of EXL, MCC, CEY, GCL, FLX, RSP, other?

Click to expand...

Here's a link to Analyst's recommendation on Coal companies in Australia and elsewhere...

http://www.kitcometals.com/commentaries/Matlack/coal/feb222006.html

Best value Aussie companies appears to be GCL and MCC.

michael_selway said:

Hey i agree with u, btw what does IOP mean?

Yeah bascially if costs are high as experienced by some of our coalers, then they would naturally demand higher prices. Coal although "dirty" is relatively cheap and still very efficient when compared to crude

Which Coal Stocks do u think will perform better at current prices out of EXL, MCC, CEY, GCL, FLX, RSP, other?

thx

MS

Click to expand...

Sorry Mike,
With IOP I meant IMO ( In my opinion) ...was kind of a lapsus.
I am not used to this computer language yet.
Well back to the coal stocks:
I do not want to give any advice, but if you`re dealing with australian securities, then I would keep an eye on GCL. They are in a phase of buying back about 4000000 shares, which isn`t very good news gazing at the speculative side, but they do have stable contracts with Japan and are having an increase in Cash-Flow. The security is interesting because of the 11 ct. dividend that has been payed recently.