In 1980 the combined coal consumption of the US and the EU was 866 Mtoe. Today, the combined coal consumption of the two is 741 Mtoe. But the increase in Asia Pacific’s coal consumption since 1980 is 2196 Mtoe — nearly triple today’s combined coal consumption of the US and EU.

China is the world’s top consumer of coal, and was responsible for the largest share of Asia Pacific’s gains since 1980. Of the 2196 Mtoe increase in coal consumption, China was responsible for 1620 Mtoe — 73.8% of the total gain.  This represents a more than six-fold increase in China’s coal consumption since 1980, which is of course partially explained by the outsourcing of manufacturing from developed countries.

No other country comes close to China’s coal consumption. In 2013, China consumed 1925 Mtoe, 50.3% of the global total. The US was a distant second at 456 Mtoe (11.9% of the global total), followed by India at 324 Mtoe (8.5%), Japan at 129 Mtoe (3.4%), and Russia at 93.5 Mtoe (2.4%).

China also produces the most coal. The 1840 Mtoe mined there in 2013 was 47.4% of the world’s total, but not enough to satisfy China’s coal demand. As with the consumption figures, the US was also a distant second in production at 500.5 Mtoe, which was more than the US consumed and 12.9% of global consumption. US coal exports are on the rise as a result. Following the US in coal production were Australia at 269 Mtoe, Indonesia at 259 Mtoe, and India at 229 Mtoe.

Australia and Indonesia both produce far more coal than they consume, and as a result they are major exporters to Asia. In fact Australia is the world’s top coal exporter, with nearly 90 percent of its exports destined for Japan, China or South Korea. US coal producers would love to expand into this market but are at a geographical disadvantage. Further, there aren’t many options for US producers wishing to export coal from the west coast. As a result, most US coal exports are destined for Europe.

Nevertheless, the US has 26.6% of global proved coal reserves — the most of any country and enough to produce at its 2013 rate for 266 years. At current market prices for coal, these reserves would be valued at some $15 trillion, so there will be tremendous incentive to mine this coal.

Following the US in coal reserves are Russia with 17.6% of global reserves, China with 12.8%, Australia with 8.6%, and India with 6.8% of global reserves. Each of these countries has enough proved reserves to produce coal for at least 100 years at 2013 rates except for China, which has only enough reserves for 31 years of production at its 2013 consumption rate. Russia, on the other hand, has enough proved coal reserves to produce at its 2013 rate for over 450 years.

Conclusions

The global coal markets are the story of skyrocketing consumption in the Asia Pacific region that far more than offsets the consumption declines in the West. The US has the world’s largest coal reserves, and because the US Environmental Protection Agency is attempting to phase coal out in the US, coal producers would like to grow their coal exports. However, these producers are constrained by geography and the availability of west coast coal export terminals in tapping into the growing Asia Pacific market.

The coal sector is one that I have not generally favored for several years. There are some opportunities, but pitfalls abound. More coal producers are likely to end up as the James River Coal Company (OTCMKTS: JRCCQ), which was forced to declare bankruptcy and is planning to auction off its assets as a result of falling coal demand. But even in sectors with such a bleak outlook, sometimes a true bargain may appear. When it does, we will bring that to your attention in The Energy Strategist.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Updates

No Coal Slump for Alliance

Even in its domestic decline phase, coal remains an essential staple for US utilities, serving as fuel for 39% of the power they generated last year. This slowly shrinking market is leveraged to US economic growth, inversely correlated with the price of natural gas as the main alternative to coal and sensitive to the possibility that future demand will be curbed by environmental regulation. It’s also plenty large enough to continue rewarding the most efficient producers, which is why we recommended Alliance Holdings (NYSE: AHGP) a year ago.

As the general partner of the Alliance Resource Partners (NYSE: ARLP) MLP, Alliance is the low-cost domestic producer defending that distinction by rapidly expanding into the low-cost Illinois Basin. Its record of delivering coal reliably and quickly thanks to advantageously located logistics assets has translated into long-term supply deals with loyal customers and into margins that are the envy of this hard-hit industry.

This recommendation has produced a 22% total return, and judging by yesterday’s quarterly results Alliance is far from done. ARLP’s profitability outstripped analysts’ expectations, with coal sales up 5.6% year-over-year, the price per ton slightly firmer and mining costs continuing to drop, down 4% per ton in a year’s time.

In the first half of the year adjusted profit was up 15% over the first half of 2013, leaving Alliance on track to top its annual guidance. ARLP increased its distribution 8.5% year-over-year. AHGP’s faster-growing payout, derived from its stake in ARLP and the incentives collected from its affiliate,  rose 10.8% from a year ago to yield 5%, more than respectable for a double-digit grower.

Management expects the modest recent improvement in thermal coal market fundamentals to continue for the remainder of the year. With all of this year’s  production and the bulk of next year’s sold, much of the price risk has been shifted to 2016, when coal could either still be slumping under the weight of environmental restrictions or else rebounding as costlier natural gas stimulates demand.

Founder Joseph W. Craft III couldn’t be goaded on the earnings conference call into forecasting industry sales volume growth next year, but did vouch for the sustainability of Alliance’s distribution and growth plans, after 14 years of under-promising and over-delivering. ARLP finished the session at a new record high, and whatever spooked AHGP bulls I expect the GP’s unit price to soon resume its climb.

With some of the lowest debt leverage in the MLP sector, excellent growth for the price, a solid yield and the competitive advantages of a low-cost producer, AHGP also offers a call option on the possibility of a rally in the price of natural gas, and consequently of coal.

And every time an inefficient competitor goes bankrupt or closes a US mine, the investment case for AHGP gets stronger. Buy AHGP below the increased limit of $77.

Present Tense for Core Labs

This is what happens when a onetime growth leader gets waylaid by industry trends: the stock sags; share buybacks stop impressing; investors wonder how long fat margins can be defended. For the second quarter in a row since it dialed down expectations earlier this year, Core Laboratories (NYSE: CLB) went on sale after releasing its results. While these hit the company’s modest near-term targets, investors seemed to focus on the fact that the profit forecast for the balance of the year suggested the company may not earn the $6 a share it had previously targeted for 2014.

Core’s trouble is that the reservoir characterization business at which it’s second to none has slowed for the major US shale basins, and the new unconventional plays and offshore work are not quite offsetting that drag. Eventually, these basins should generate more production enhancement revenue for Core, but in the meantime the company is paying the price for largely abandoning work in Venezuela and Argentina as a result of currency and collection issues.

The effective 4%+ yield paid out to shareholders via dividends and buybacks has provided some support, but less than we would have hoped because it represents the bulk of Core’s cash flow.

Still, this is  technology leader worth sticking with, because if and when growth revives sentiment and the share price could rebound in a hurry. For now, CLB remains a Hold.  

— Igor Greenwald