Quick, what's been the fastest growing fuel source in the world since 2000?
The last thing to come to mind is probably coal. And yet, that's the correct answer.
The reason coal was last on your mind is because you live in the United States.
That's precisely why the hated fuel is ripe for a contrarian play.
That Thing Called Asia
Outside our retina scan-protected borders there's this crazy thing called the rest of the world.
It still burns coal... a lot of it.
(You can see historic and projected use from the EIA figure, right.)
While electricity produced by coal fell 21% in the U.S. last year, demand for the stuff grew 65% in India, 81% in South Korea, and 119% in Japan.
That was enough for U.S. coal exports to reach their highest level since 1991, up to 107 million tons worth $16 billion — twice the amount of coal we exported just five years ago.
With coal under attack by the EPA here at home, related stocks are down around 52-week lows.
And since no one is paying attention to the global game, it's time to take another look at beaten down coal stocks...
A Two-Decade Coal Bump
Yes, coal's share of U.S. electricity generation is down more than 20% from its highs.
And the Energy Department says domestic demand could slip another 10% this year, falling below one billion tons for only the second time since 1995.
It even said exports would drop slightly over the next two years.
But while we might use less than a billion tons this year, the rest of the world will burn six billion tons of coal.
That's expected to rise to 10 billion tons by 2030, at which time the United States will be exporting 130 million tons.
In percentage terms, global coal demand will grow at least 40% and U.S. exports at least 20% in the next 18 years.
Those are government estimates. The coal industry is much more bullish, with Arch Coal (NYSE: ACI) predicting coal exports will reach 245 million tons by 2015. The latter scenario offers 129% growth in less than three years.
The only way global demand will wane is if China and India grind to a halt.
But demand there — and elsewhere — is looking healthy...
In India this week, Financial Express ran an article entitled, “Power Plants Grapple with Coal Shortage,” that reported 19 power plants with less than a four-day stock and 30 plants with less than a seven-day supply.
Even in Australia, where a carbon tax kicks in on July 1st, analysts are noting that coal will be king for some time...
They produced 83% of their electricity with coal in 2010 and, even with carbon caps looming, Standard & Poor's has noted “much of the existing coal-fired fleet is likely to continue to be necessary for system security and reliability for decades to come.”
The Port to Profits
The U.S. has lots of coal. It has a wonderful rail infrastructure. But the piece of the logistical puzzle that is weakest is terminals. To get to the next level of growth, the new terminals need to be built.
To make that happen, companies are turning their eye to export infrastructure, which is the same thing going on in the natural gas industry because of abundant shale supply.
Plans in Washington State would add tens of millions of tons of port capacity for coal mined in Montana and Wyoming.
In Texas, Kinder Morgan Energy Partners (NYSE: KMP) is spending $140 million to expand a Houston coal terminal.
As Energy Information Administration analyst Bill Watson noted last week, “High demand by China has rippled through the markets. The prices have been very high, so anybody who can mine and ship coal certainly has a lot of incentive to do that.”
I'd start looking at the companies mentioned here and at an ETF like the Market Vectors Coal (NYSE: KOL).