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Wildly Expensive Natural Gas Gives Hope to Coal Miners


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Relative to most of the world, the United States is awash in natural gas. So much so that we have a jaded view of what the fuel really costs. In other countries, high natural gas prices have pushed governments and corporations to embrace coal. South Korean steel giant POSCO is the perfect example.

Too much gas
The combination of hydraulic fracturing and horizontal drilling opened up oil and natural gas fields that were previously unprofitable to drill. This combination led to an increase of both fuels, but natural gas was a significant beneficiary. Only the U.S. market for natural gas is largely closed so the increased supply had nowhere to go and natural gas prices fell to historic lows.

With limited ability to export the fuel, the price of natural gas in the United States diverged from the price of the fuel in the rest of the world. That's been such a benefit that large domestic gas users like steel mills and electric utilities have been singing the praises of the advantage. And it's been a good ride, allowing investment and growth that may not have been possible if natural gas were more expensive.

Much less gas
But that's the United States, not the rest of the world. In the rest of the world, coal is the cheapest fuel option. It's why coal giant Peabody Energy keeps pressing the fact that giant developing countries China and India are still building coal fired power plants despite the negative view of such facilities in the United States. According to Peabody, coal, "...grew dramatically faster than all other major fuels in past decade" and coal is, "...projected to account for [the] largest percentage of global electricity generation growth."

(Source: Ksiom, via Wikimedia Commons)

This is backed up by South Korea's POSCO, which is building a synthetic gas plant that will use coal as its feedstock. The specific goal is to use low cost coal to make gas so POSCO can avoid using high-priced liquified natural gas. POSCO has also teamed up with a Mongolian company in a 50/50 joint venture to build a synthetic gas plant in that country. In other words, this isn't a fluke, POSCO sees coal gasification as an important growth driver.

That's great news for Cloud Peak Energy , which is the largest U.S. exporter of coal to South Korea. It also helps back up Cloud Peak's long-term goal of increasing its Powder River Basin coal exports to drive growth. Exports have been a bright spot, too. Last year, Cloud Peak's domestic coal volume fell about 5.5%, but exports increased by nearly 7%. Since domestic sales are the driving force at the miner, it's still struggling a bit. But, unlike some other miners, it's remained profitable throughout the domestic thermal coal downturn.

Sadly, Cloud Peak has limited access to port capacity, which makes increasing its foreign exports difficult at best. But its strong relationship with South Korea is clearly a positive as companies like POSCO embrace coal to reduce their reliance on natural gas. It's worth noting that Peabody is a big player in the Powder River region, as well. Oh, and Peabody also mines for thermal and met coal in Australia, which puts it in an even better position to deliver coal to key Asian markets.

Look past low domestic gas prices
Being dirty is the biggest knock against coal. However, being cheap and abundant often offsets that issue, particularly in developing nations. Advancing technology, like coal gasification, is even making coal more palatable in more developed nations like South Korea. Look for international giant Peabody to benefit while keeping an eye out for more export capacity at Cloud Peak.

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The article Wildly Expensive Natural Gas Gives Hope to Coal Miners originally appeared on Fool.com.

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