First, here’s the good news for coal: the new report by the global bank, HSBC estimates it’ll be around for awhile.
“I saw that, according to the data, coal demand is going to grow in the future in the U.S,” Jordi Dominguez said. He’s an equity research analyst for HSBC, and the author of the report. HSBC’s analysts study markets and issue stock recommendations.
“Well, you have plenty of coal in the U.S., there’s going to be a demand in energy growth in the U.S., so coal seems to be a logical answer,” he said. “It’s good news for coal.”
But it’s better news for some coal. Dominguez predicts that in the future, mines in Wyoming’s Powder River Basin will be more profitable than Appalachian coal.
The report (which is only available to HSBC's clients) looks at the effect of carbon capture and sequestration technology where harmful carbon dioxide, released by burning coal, is captured and stored deep underground. This technology is already starting to be developed, but will likely be required if Congress passes a cap-and-trade bill.
“The problem that these plants have is that they’re more expensive than conventionalplants, and they’re less energy efficient than conventional plants, as well,” Dominguez said. “So you have higher costs per generation of energy unit.”
Dominguez says companies will have to cut back elsewhere to make a profit. And it’s cheaper to mine coal in Wyoming because the land is flat, there are thick coal seams and not as much overburden as in Appalachian mining. So Dominguez says companies that mine in the Powder River Basin will be more profitable in the future.
But Appalachian coal is higher quality than Wyoming’s coal, and mine consultant and owner of Morgan Worldwide, John Morgan, says that will work in West Virginia’s favor.
“West Virginia coal has got a higher energy value, which means it’s got more BTUs per pound,” he said. “It also is lower sulfur.”
So when you burn a ton of West Virginia coal, it produces more energy than a ton of Wyoming coal. Dominguez says this doesn’t make up for the higher costs for mining in the mountains, but Morgan disagrees and says mining in Wyoming has unique expenses too.
“So the mining cost is lower,” Morgan said. “However, the transportation cost for bringing that coal to central U.S. generating stations is going to be higher, and that competitiveness of that coal is going to be affected by those transportation costs.”
But Morgan says in reality both Powder River Basin and Appalachian coal will play a role in the nation’s energy.
“So, I think that the generating stations are going to use a blend of Powder River Basin coals,” he said. “But Central Appalachian coal, particularly Northern Appalachian, but then to a certain extent some of the Illinois basin coals, are going to be an important part of the fuel blend. But any utility is going to try to create a blend.”
The HSBC report recommends buying stock in Arch Coal and Peabody Energy because of their extensive involvement in the Powder River Basin. The report doesn’t recommend buying or selling stock in two companies that mine mostly in Appalachia: Massey Energy and Consol Energy.
This is partly, Dominguez said, because stock in both companies has risen lately, making it expensive. But it’s also due in part to the bank’s outlook for Appalachian coal.