Wednesday, December 19, 2012

Bearish 2013 Coal Outlook for US and Europe

But Some Investors Take a Contrarian View

Even though coal is the backbone of electricity production in the United States and Europe, use of the fossil fuel in the U.S. and European countries will decline in the coming years as a result of increased natural gas production in the U.S. and carbon-cutting mandates and policy targets in Europe. Read more.

There will be a growing demand for bio-coal, or torrefied biomass, a drop-in replacement for coal that is carbon neutral if made from sustainable supplies of low-grade wood and wood waste, agricultural waste products, and similar feedstocks. Unlike wood chips (a bio-coal feedstock) and wood pellets, bio-coal can be co-fired with nature-made coal--meaning, bio-coal can be pulverized, or powdered, and injected into coal-fired furnaces along with the fossil fuel in a blended ratio of, say, 10% bio-coal and 90% coal. (Click here to read more about bio-coal.)

That said, demand for coal in China--home of the world's deadliest and dirtiest coal mines--and India will remain strong and probably increase. "The five largest coal users--China, USA, India, Russia and Japan--account for 76% of total global coal use," according to the World Coal Association.

Thus, while the transition away from coal use is underway in the U.S. and Europe, global consumption could actually increase in the near future. This is the bullish case, the main reason many contrarian investors are taking a fresh look at coal. (Click here for the bullish case for coal in pictures; and here, for the International Energy Agency's medium-term outlook on coal.)