Monday, March 26, 2012

Coal: An underrated long term investment opportunity?

            This is not sexy, it is not glamorous, and it is not about the next Google, Apple or Facebook.  This is about dirty black stuff, which pollutes the air, more than any other source of energy we use.  I wish we would learn to do without, or do with less.  I in fact wrote a book entirely dedicated to promoting a global trading system, meant to help us move away from killing our environment in the name of jobs and consumer products.  I never really believed that my idea would ever enter mainstream culture, so I have to remain realistic and instead of convincing myself to see what I want to see, I have to remind myself to remember to always seek reality.

            So yes, I believe there is a huge opportunity for some to invest into a future trend that has real potential to yield significant returns in the next few decades.  To reap a profit from this, one has to be patient, and go about it in an intelligent manner.  I believe this potential investment is one of the last great chances to invest in a trend that will provide for great returns.  It should be something to look out for, precisely because everyone seems to have written it off, and few are talking about it.

The Facts on coal:

We currently have about 800-900 billion tons of coal resources underground that can be reached with current mining technology, and within a reasonable expectation of what prices will be for this commodity.

Currently the world produces and consumes about 8 billion tons per year, which would imply that at current rates, we have maybe 100 years worth of the stuff in reserve, so scarcity is hardly an urgent and imminent issue.

China produces and consumes about half the coal in the world currently and this is the key to realizing that we are looking at a great investment opportunity.

The facts on the alternatives to coal:

The case for renewables, or I should say the case to doubt the renewables can be made based on the fact that increasingly governments are strapped for cash, and these renewables have been dependent on subsidies in most cases.  Recently Germany, which up to now has been a champion of renewable energy, just announced that they are ending their subsidy for solar energy.  In the US, the Solyndra scandal has given the industry a bad name.  I still expect the world to increase its use of renewables, but it will only keep pace with the increase in the overall rate of global energy demand at best.

The recent story with natural gas has been that we are currently sitting on embarrassingly large deposits of it globally.  The story of the 100+ years worth of supplies in the US has been advertised by the industry for a few years now, and most have accepted to repeat this like the good parrots they are.  Fact is that in the past few years we went from the fantasy of as much as 4000 tcf of shale gas, to a recently downward revised figure released by the EIA of about 500 tcf that are technically recoverable.  Industry insiders, economists, investors and policymakers still talk about the 100 + years of gas however, and it seems that everyone is choosing to ignore the fact that taken into the larger perspective of the global hydrocarbon big picture, shale gas is in fact not such a great game changer for the long run.

John Pinckerton, of Range Resources just announced a few days ago in an interview with the Wall Street Journal that he believes, gas will be abundant, and in the US, the price range will remain in the $4 – 6 range, for the rest of his working career, thanks of course to the shale gas boom.  The world’s consumption of hydrocarbons, in gas equivalent is about the same for a year, as the entire technically recoverable reserves of shale gas identified in the US.  Even if it turns out that worldwide there will be four times more shale gas, than what we know to be there in the US, it is still not nearly as great of a game changer as we try to make it out to be for the long-run.  Fact is that we are just very hungry for energy, and even immense new resources being added to our potential supply, just do not make such a great long-term impact anymore.

An opportunity for profit:

            I mentioned already that China currently produces and consumes roughly half of all global coal output, or about four billion tons per year.  They claim that they have about 114 billion tons of reserves, but they have been claiming this number for more than a decade now, and they produced about 30 billion tons since then.  So in reality, even if the original claim of 114 billion tons was somewhat conservative, fact remains that it is unlikely that they have more than another 100 billion tons left.  From now, till about 2030, they will produce another 70 billion tons, if they maintain current rates of production.  Needless to say that somewhere between now and 2030, their production volume will start declining.  My guess is that it will happen around 2025 or so, and the decline rate will not be all that gentle.  A decline of 100 million tons per year should be a reasonable expectation.  So it is reasonable to assume that by 2030, China will produce about 3.5 billion tons per year at most.

On the consumption side, I assume there are three possible scenarios we can work with as points of reference.  The first one would be that the pace of increase in consumption will continue at current levels of about 10% per year, which has been the case in the last decade.  This is of course highly unreasonable, because it would mean that by 2030, they would consume about 23 billion tons per year, or almost 6 times more than in the present.  The global economy would not warrant such a rate of expansion in their consumption, even under the assumption of the most optimistic projections of growth.  Furthermore, China will most likely switch to ramping up its gas consumption regardless whether they will produce large volumes themselves or not.  Renewables and nuclear will also play a larger role, albeit not nearly enough to make a serious dent in a hypothetical continuation of their ramp up of coal consumption.

The second scenario is the one where we take the projections for global economic growth released recently by the likes of Goldman Sachs, the World Bank, and the IMF as given, and thus the world will expand at a rate of about 3.5% per year on average.  This would mean that China’s rate of GDP growth would be about 7% per year, which is far less than the 10% rate we saw in recent decades, but still robust enough to warrant the assumption that they will increase their rate of coal use at a very fast pace.  In past decades, they increased their rate of coal consumption at a similar rate as their overall GDP growth.  I assume as I stated already that they will most likely also ramp up the use of renewables, gas, and nuclear at a faster pace going forward, and we should expect them of course to advance in efficiency, so a rate of 5% increase in coal consumption until 2020, and then a decrease to 4% rate of increase from 2020 to 2030, is a reasonable expectation we should factor in.  This would mean that by 2030 they will use about 9 billion tons of coal per year.  Their imports will have to rise from about 500 million tons currently, to 5-6 billion tons per year.  So the only obvious conclusion we can draw from this, if we believe in the analysis of the mainstream, is that in places like the US, where large deposits of coal are known to be underground, production will ramp up at a fierce pace in the next few decades, and there are of course many ways that one can profit if properly positioned.

As I stated in previous posts, on my blog, I believe that global rate of GDP growth will be significantly less in the next two decades, than the mainstream projects.  My own conclusion left me to believe that between 2010 and 2030, average GDP growth rate will most likely hover at around 2% per year.  So does this mean that coal is not a great investment opportunity anymore?  China will be growing at a rate of about 5% per year in this scenario, and even with the above mentioned ramp up in consumption of other sources of energy, we should still expect a rate of growth in coal use of 2% per year until 2020, and a 1% increase per year from 2020 to 2030.  By 2030, they will still consume about 5.2 billion tons, and because they can only be expected to produce 3.5 billion at best, there will be a need for about 2 billion tons per year to be imported. 

If we can hold it all together and prevent the global economy from collapsing by 2040, they will likely have to increase their imports to about 3 billion tons per year at the very least, because by then, they will be almost completely out of their own supplies of coal.  So if someone were to play this by buying property near a currently well known coal deposit, where mining should be expected to commence in the next few decades to meet this demand for coal, it is possible that a good load of patience would be required to make this work, but the payoff could be as much as a three or fourfold return on original amount invested.  Comparing that, to other investments such as buying 30 year US government bonds, which currently yield about 3.5%, it is not so bad.  Similarly, if we are to look at the performance of the stock markets, in the last decade or so, not only is there less risk in buying property near potential new mines, because purchasing land carries only the risk of a loss of only a small portion of principal, but if the investment works out, it will most likely outperform the returns of the western stock markets by a very wide margin, allowing those who made this step a true chance at a decent retirement.

One final issue I want to address is the moral aspect of it.  Many people may feel that it is wrong to profit from the process of trashing our planet.  The irony of such a stance is that through the process of those who do have enough conscience to realize what they are doing to the planet, consciously foregoing opportunities to profit, they are aiding in the process of making those who do not have a conscience in this regard richer, and therefore more influential, while they continue to become poorer and less influential.  A trend such as the one I described in regards to the coal industry cannot be stopped by conscientious people foregoing personal benefit.  The only thing that can now stop it is a mechanism that changes the incentives that drive the global economy, like the one I proposed.  In the absence of such a mechanism being implemented globally, there is no point for anyone to go through the futile process of self-sacrifice.


  1. “Currently the world produces and consumes about 8 billion tons per year, which would imply that at current rates, we have maybe 100 years worth of the stuff in reserve, so scarcity is hardly an urgent and imminent issue.”

    The key phrase there is 'at current rates'. The problem is, in a post peak oil world, no alternative energy source is going to deplete 'at current rates'. Far from it.

    The rise in the number of hybrids and electric cars suggests that oil is becoming too expensive to use as vehicle fuel. Once all cars have swapped over to electric (which is essentially fueled by coal), and once China and India are well and truly hooked on the automobile, watch your 100 years worth of coal shrink to about 20 years worth – if that. Also, the coal that’s left is the energy poor stuff. If we’re lucky, we’ll get ten years of useful fuel out of it.

    1. I agree with you. As my chart shows, coal consumption should increase even under very poor global econmic conditions. And of course we have the low hanging fruit effect, which means that best quality and easiest to recover resources always get produced first.
      On the issue of our future of plug in hybrids and electric vehicles, I am somewhat skeptical. In fact the future of the car industry is my next week's topic.

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  3. The call to reduce the use of coals is valid for western countries but unfortunately, coal statistics show developing economies are more likely to increase their use of coal in coming years because of its affordability and to meet increasing demands for electricity and steel for the coal industry.

    1. The only way we can reduce the damage to the environment that coal consumption and other economic activities will inflict, is to implement a global mechanism to encourage efficiency all around, not just selectively, or voluntarilly. That is what my proposal for the global sustainability tariff is all about.

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  5. I just don't understand why economist emphasize more on long term investment options. Today's world is really unpredictable, demography, politics, environments and etc all these things are changing, you never know what circumstances will be for particular region within next decade. So, I (at least) focus on investment opportunities with shorter terms and handsome returns...

    1. Thanks for your participation Broblogger. It is true that playing the short term moves of the market is not only far more exciting, but also has the potential to bring better returns. I think however that short-term plays also have the potential to generate more losses, especially, since short-term betts are more about trying to figure out where the herd is headed, and try to beat them to it, rather than about the fundamentals. One can easily get it wrong as we all try to be wise guys and get ahead of the curve.

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