A Renewed Sense Of Energy

The global coal industry is in the midst of a permanent structural shift in the form of the emerging dominance of the Asia-Pacific region.

China and India are at the heart of the transformation, firmly placed as the world's No. 1 and No. 3 biggest coal producing nations, respectively. (The U.S. is No. 2.)

And demand in the world's two most populous nations is growing rapidly.

India's imports of thermal coal, used in power generation, rose 60% in 2009 to 57 million tons. China shifted to a net importer last year to the tune of 70 million tons of thermal coal, despite large domestic resources of the black rock.

Both countries are also experiencing a spike in demand for metallurgical coal, a main ingredient of steel, as their economies continue to mushroom.

At the end of January, Peabody Energy (NYSE:BTU - News) said it is expanding a mine in Australia at a cost of $70 million to boost capacity by 1 million tons within several years to meet growing demand for metallurgical, or met coal, used by steel companies in China, India and other Asian nations.

"China and India have permanently changed the seaborne metallurgical and thermal coal market landscape," CEO Gregory Boyce said. Peabody enjoyed a 37% increase in Australian coal shipments in the second half of 2009.

Alpha Natural Resources (NYSE:ANR - News) said it sees much strength in the metallurgical markets in 2010. It raised its metallurgical shipment guidance by about 1 million tons, to 11 million to 13 million tons for this year.

Meanwhile back in the U.S., the enormous stockpiles of coal racked up by utilities during the depths of the recession are starting to shrink after extremely cold weather in December and January.

According to U.S. utilities, which use coal to generate nearly half of America's electricity, roughly 50 to 60 gigawatts of coal will go offline over the next 10 years or so.

The U.S. will need to replace that energy, and renewables such as solar, wind, small hydro, modern biomass, geothermal and biofuels are one of the paths to take to fill that void.

1. Business

IBD's Energy-Other group includes any energy source that is not oil or natural gas. The group's 800-pound gorilla is coal.

Coal mining, especially underground, is a capital- and labor-intensive business. It is also a very high fixed-cost business.

Electricity demand has been the primary value driver for thermal and steam coal for a long time, with steel being the other big driving force.

In 2009, the U.S. produced 1.08 billion tons of coal, mined primarily from four major coal basins with smaller ones spread across the country. The four are the northern and central Appalachian basins, the Illinois basin and northern Wyoming's Powder River Basin.

Peabody is the largest U.S. coal miner, producing 215 million tons last year. It is the only U.S.-based company in the group with international mining operations, in this case Australia.

Arch Coal (NYSE:ACI - News) is the second-largest company in the group; Alpha Natural Resources moved into the No. 3 slot with last year's acquisition of Foundation Coal for $1.4 billion in stock. Consol Energy (NYSE:CNX - News) and Massey Energy (NYSE:MEE - News) are fourth and fifth, respectively.

The U.S. is capable of generating roughly 1,000 gigawatts of electricity per year. Coal generates some 325 gigawatts, natural gas kicks in 400 and nuclear makes up another 100, according to Brian Gamble, an analyst at Simmons & Co. The rest, he says, is split between hydropower, solar, wind, geothermal and biomass.

"The segment of the U.S. power grid that is made up of renewables is quite small," Gamble said. "It is a growing market, albeit from a small base, but we don't expect solar, wind or any other renewable to gain significant market share for some time."

The group includes several solar companies, including Chinese firms like Trina Solar (NYSE:TSL - News) and Suntech Power (NYSE:STP - News).

First Solar (NMS:FSLR) is the largest U.S.-based solar company by market share. Other American firms include Real Goods Solar (NMS:RSOL), GT Solar International (NMS:SOLR) and SunPower (NMS:SPWRA).

While multinationals such as GE (NYSE:GE - News) and Siemens (NYSE:SI - News) have made a strong push into wind power, those diversified industrial giants are listed in other stock groups. In the Energy-Other group, Danish company Vestas Wind Systems (OTCBB:VWDRY.ob - News) is the largest wind-power company.

Ormat Technologies (NYSE:ORA - News) and U.S. Geothermal (AMEX:HTM.a - News) operate plants of geothermal energy, power generated from heat stored in the Earth.

Name Of The Game: It's simple: produce and supply coal, wind, solar, hydropower and other renewables to fulfill the world's energy needs, which are expected to grow rapidly over the next 20 to 30 years, says Michael Dudas, an analyst with Jefferies & Co.

2. Market

U.S. utilities are the biggest customers for coal producers and renewable energy alike.

Steel makers are the next biggest consumers of coal.

The entire coal market, which is dominated by the publicly traded miners and small mom-and-pops, is estimated at roughly north of $52 billion. The U.S. is expected to produce 1.07 billion tons of coal this year, with public coal companies churning out more than half that output.

The renewables market is a bit tougher to size as the adoption of these alternative energies is still in early phases. But rough estimates for the global wind and solar market is roughly $100 billion, with 70% of that produced by wind. The U.S. wind market is roughly $20 billion, according to Simmons' estimates.

3. Climate

The biggest issue facing the coal industry is permits being held up by the Environmental Protection Agency that are needed to continue producing coal. Environmentalists contend coal mining is destroying landscapes where these basins are located.

"The problem here is that we are going to experience energy usage growth of 50% over the next 25 years, and we can't do it without coal, which is one of the cheapest forms of energy," Dudas said.

Coal stockpiles rose last year as demand fell. Businesses were forced to close and shutter production, while consumers used less heat to save on their energy bills, Dudas says.

"Coal producers will have to manage their output and in some cases shut mining operations down until the stockpiles begin to decline, which has already begun," he said.

Last week, U.S. industry executives from the wind, solar, hydropower, geothermal and biomass sectors pushed for a federal renewable energy standard, which would set a percentage of how much energy must come from renewable sources in the U.S.

The group wants an extension of tax incentives and said stimulus funds powered most renewable expansion last year. President Barack Obama has urged Congress to set a national standard that would require 25% renewable power by 2025.

A federal standard, which they say will foster economic growth and create jobs, could spur these industries at a time when China is moving swiftly into alternative energy production.

4. Technology

Most technological advances in this industry group have occurred in renewables.

For example, ethanol producers, such as BioFuel Energy (NMS:BIOF) and Pacific Ethanol (NMS:PEIX), use corn oil extraction technologies to produce the biofuel.

Companies such as Hy-Drive Technologies provide natural gas or hydrogen-generating systems for diesel and commercial fleets.

And FuelCell Energy (NMS:FCEL) makes stationary fuel cells, which electrochemically produce electricity directly from hydrocarbon fuels for commercial, industrial, utility and government customers.

Solar power companies have to be tech-savvy to generate electricity from sunlight. This can be direct as with photovoltaics, or indirect as with concentrating solar power, where the sun's energy is focused to boil water, then used to generate power.

5. Outlook

Over the next decade, coal plant retirements will take roughly 50 to 60 gigawatts of coal generation offline.

The U.S. will need to replace that lost energy, and renewables are the answer, Gamble says.

"It will take a mix to fill the void, and there will be a shift, but renewables won't fill that need overnight," he said. "In order to make this happen, there will have to be additional infrastructure built, which becomes an expensive proposition no matter how you slice it."

Nuclear, natural gas and renewable energy can each fill part of that role, but additional coal assets must be built in the meantime.

Upside: The world has unquenchable thirst for energy as emerging economies continue their rapid growth and populations in developed nations continue to swell. That demand should fuel business for traditional sources like coal as well as renewables.

Risks: Another recession could further sap demand for coal, which could increase stockpiles and restrain mining operations. Also, tougher regulation in the U.S. would make starting new projects difficult.