Coal rising to top of energy heap

Wednesday, August 2nd 2006

Coal is in the running to overtake oil as the best-performing energy investment.

That, at least, is the emerging consensus from a range of speculators, investors and giant corporations including Wilbur Ross, the billionaire bankruptcy specialist; BHP Billiton, the world’s largest mining company; and Merrill Lynch, the U.S. securities firm.

Because “coal is the cheapest, most abundant energy source” from North America to China, the surge in oil prices “has encouraged people to plan new coal-fueled power plants and to start using conversion technologies such as coal-to-diesel,” said Richard Price, an investment banker at Westminster Securities in St. Louis, Missouri.

Coal is poised to top its recent highs because of record oil and natural-gas prices, said Francisco Blanch, the chief commodity analyst at Merrill Lynch in London.

In Europe, coal was at $62.55 a ton last week after reaching a 10-month high of $66.83 in March, according to ICAP, the interdealer brokerage.

Prices paid by U.S. utilities will climb 5 percent in the next year and double by 2021, said Price, a former vice president at Peabody Energy, the largest U.S. coal producer.

Converting coal into liquid fuel or natural gas becomes economical when oil remains at more than $40 a barrel, said Stephen Leer, chief executive officer of Arch Coal, a U.S. producer.

The cost of oil has more than doubled since January 2004, reaching a record $78.40 a barrel in July and averaging $68 in New York this year. It has not traded at less than $40 since June 2004 and will fall 19 percent next year to $60, according to the median forecast of 19 analysts who were surveyed.

Ross, 68, chairman of International Coal Group, is convinced that the search for a cheaper alternative to oil and natural gas will enable coal to outperform oil.

“We certainly bet on that,” Ross said in a telephone interview from Paris. “The argument against it is not an economic one. It’s about the environment and emissions.”

Analysts say the price of coal in the United States is expected to recover from a decline this year that was caused mainly by a mild winter.

Prices in Wyoming’s Powder River Basin, the country’s largest producing region, have fallen from a record $21.50 a ton at the end of last year to $11.50, while the Eastern coal benchmark has declined 15 percent, to $49 a ton.

For the United States and China, the largest energy users, coal offers a way to reduce their reliance on Middle East oil, which has tripled in price since 2002.

The United States is said to have enough coal to last almost two centuries; today, it imports two-thirds of the oil it uses.

Coal producers are acquiring reserves after the U.S. government estimated that demand would increase by 3 percent a year, almost twice the rate for oil.

Peabody Energy, which is based in St. Louis, Missouri, offered 1.83 billion Australian dollars, or $1.4 billion, on July 5 for Excel Coal, the large Australian coal producer.

“A lot of the future energy requirements globally will have to be satisfied by coal,” said Michael Schroder, head of resources at Old Mutual Asset Management in Cape Town, which manages assets that include shares in the mining companies BHP Billiton and Anglo American.

“Coal seems to be on the agenda of lots of countries.”