Coal: Outlook Looks Good for Long-Term Investors

Coal gets no respect. It's is dirty, lumpy and unremarkable. It is a game show loser prize, a punishment for bad children at Christmas. In terms of our daily lives, coal is almost wholly out of sight and out of mind. Yet the entire Industrial Revolution was founded on coal.

Oil may hog the limelight these days, but coal has not gone dormant. If anything, today's world relies on coal more than ever before. According to recent figures from the World Coal Institute, 24.4% of primary energy consumption worldwide comes from coal. Coal's share of worldwide electricity generation is 40.1%. In the United States, more than half the country's electricity comes from coal; in China and Australia, the totals approach 80%; in Poland and South Africa, the totals are above 90%.

For perspective on how much physical coal the world eats up, consider this: According to the science Web site, howstuffworks.com, the electricity required to power a single 100-watt light bulb, if left on 24 hours a day, would consume 714 pounds of coal over the course of a year. Most of us do not leave our lights on round the clock, but we tend to have many going simultaneously. (Never mind everything else left on around the house.)

As it turns out, the world's heavy coal users - folks like you and me - don't even know they have a habit. That ignorance is a luxury, provided by the blessings of modern technology. For the majority of its history, coal has been a particularly nasty source of urban pollution. Blackened lungs and reddened eyes go all the way back to the High Middle Ages. In the year 1285, King Edward I - commonly known as Edward the Longshanks - had two great battles on his hands. In Scotland, there was William Wallace; at home in London, there was coal. The King tried, and failed, to curtail London's use of coal on public health grounds. Harsh bans and brutal penalties were put in place, but acrid smoke continued to foul the air. With the city growing rapidly and the forests in retreat, London's pressing need for fuel and heat trumped all else.

Some 500 years after Longshanks, the potent combination of coal and steam had transformed England and kicked off the Industrial Revolution. By the 1850s, Britain was officially urbanized, with 51% of the population living in cities. And what living hells those early industrial cities were, Manchester chief among them: sky black with smoke, ground black with soot, the very air choked with dust. Scores of Manchester children were struck with rickets, a vitamin deficiency malady that softens the bones due to lack of exposure to sunlight. Fifty-seven percent died before the age of five. Those children who survived typically toiled the rest of their lives away in the factories and the mines.

All that misery is gone now (in the Western world, at any rate). Modern coal-fired power plants are paragons of efficiency and discretion. Leviathan jets of flame 10 stories high consume as much as 500 tons of coal per hour, hidden in the confines of gigantic boilers that convert heat into steam and steam into electricity. It all happens behind closed doors, on guarded grounds outside city limits. We no longer see, smell or taste the coal. We only flip on the light switch.

Yet, for all the cleaning up the coal industry has done, we are still paying a heavy toll for coal use. Western coal plants no longer belch black smoke; their emissions have been vigorously scrubbed and filtered, in accordance with the law. But these scrubbed emissions still make a disturbing contribution to the likes of acid rain and other "slow-fuse" environmental concerns like rising carbon dioxide emissions. And in less fastidious jurisdictions - like the entire country of China - "unscrubbed" emissions from coal-fired plants have produced some of the most toxic cities in the world. Many Chinese cities resemble the Manchester, England of old.

The New York Times reports that China uses more coal than the United States, Japan and the European Union combined. China's plants are older, less efficient and produce more toxic emissions than their regulated Western counterparts. China's massive pollution clouds have been known to travel the breadth of oceans, clogging up filters as far away as Lake Tahoe. With India following in China's sooty footsteps, a global pollution epidemic may be in the works.

So should we feel gratitude or disgust toward Old King Coal? It's hard not to feel a mixture of both. On the whole, coal has been very good to us. As a driver of the Industrial Revolution, however hellish initial conditions were, coal brought about the rise of manufacturing and the high standards of living the West now enjoys. As an ongoing source of cheap power, coal now gives China and India a chance at continued rapid growth. But none of this is without cost. China possesses seven of the world's ten most polluted cities, thanks largely to the country's heavy reliance on coal-fired electricity.

Even so, the world will not be going off coal anytime soon. Energy economics tilt heavily in coal's favor, especially in the developing world. New coal plants, still being built at a rapid clip, have operating life spans of half a century or more. It wouldn't make sense to mothball them prematurely. Countless existing plants have decades left to go. Last, but certainly not least, countries like China and India also have to deal with an emerging middle class and the rise of consumption-based lifestyles. They may need all the energy sources they can get their hands on - both dirty and clean - to keep up with demand in future years.

Meanwhile, coal-to-liquids technologies, as well as various "clean coal" technologies, will continue to promote demand for coal throughout the Developed World. Given all these demand factors, $40-a-ton coal seems way too cheap.

It is interesting to note that the price of coal, relative to the price of crude oil, has slumped to its lowest level in a decade. This relationship does not necessarily imply that coal prices are approaching an important bottom, but it does suggest the possibility.

Long-term investors take note.

Justice Litle
for The Daily Reckoning Australia

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