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Even Persian Gulf States Are Moving to Coal

by: Trader Mark July 21, 2008 | about stocks: KOL    
Trader Mark

Trader Mark

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Thanks to a reader for sending this article... quite fascinating really when you sit and think about it. Especially the fact the Gulf countries, sitting on piles of dead dinosaurs, are moving into coal. We've been talking a lot about this sector of late, almost as much as fertilizer in the fall. Hopefully the drama in this sector modifies soon and we can move into calmer times where fundamentals trump paranoia.

I can sum up this thesis very succinctly - economics trumps environment. Unfortunately in a bottom-line business of making investors money, I can only worry about the economics.

  • Der Spiegel, the German newsmagazine, explained earlier this month why the Persian Gulf states are switching to coal. “[They] may be sitting atop massive oil reserves,” the magazine said. “But with prices for crude skyrocketing, it makes more sense to sell it than to use it. Instead, the Gulf states are turning to coal for their own energy needs – to the detriment of the climate.”
  • “Demand for coal plants,” the magazine says, “is growing rapidly across the globe.”
  • Abu Dhabi (largest of the seven UAE emirates) has announced that it will switch to coal-fired power plants.
  • Dubai (the second largest) is already building four of them – with a combined output of 4,000 megawatts – as a first-phase investment in coal.
  • Apart from the United Arab Emirates, Oman (widely regarded as “the next Dubai”) has signed a contract with South Korea for the construction of several coal-fired plants.
  • Beyond the Gulf, Egypt proposes to build its first coal-fired plant on the shores of the Red Sea.
  • Russia has announced plans to build more than 30 coal-fired plants by 2011.
  • China connects a new coal-fired plant to its electrical grid every 10 days – and intends to keep doing so for several years. Less known is China's decision to construct a massive coal-fired plant in Inner Mongolia that will convert the region's vast coal reserves into oil.
  • The coal-to-liquid process used by this plant will consume twice as much coal and produce twice the CO{-2} emissions as the simple burning of coal in a conventional power plant.
  • The Kyoto Protocol, incidentally, classifies the Gulf states as developing countries – meaning that they are under no obligation, oil revenues notwithstanding, to reduce CO{-2} emissions.
  • They have opted for coal for a single compelling reason: cost. They can produce a megawatt-hour of electricity using Australian coal, Der Spiegel calculates, for $17.49 (U.S.). Using natural gas, the cost rises to $41.34. Using oil, the cost rises further to $79.50.
  • One of the ironic differences between Germany and the Gulf states, Der Spiegel observes, is the absence of solar energy investment “in the sun-baked Gulf states.” Germany produced 1,300 megawatts from solar installations in 2007; the Gulf states combined produced 36 megawatts. (that's beginning to change)
  • Other German Greens are championing – you are ready for this, right? – coal. “The more strident of the anti-nuclear politicians in Germany are now advocating new coal and gas plants to ward off a certain electricity supply crisis,” Mr. Aplin says. “Why is coal in this mix? It is cheap and domestically available.”
  • Late last week, though, Germany's Finance Ministry issued a remarkably candid public statement. It conceded that Europe's proposals for reductions in greenhouse gases – without the participation of all major contributors worldwide – will be pointless. (Bingo - for every light you turn off in your house or change from 22 mpg to 27 mpg auto, entire cities are being built in other countries - without everyone cooperating there is no "saving the Earth" - and you know how well countries cooperate. The U.S. won't even enter these agreements, and is the biggest pollutant, and China has other issues to deal with - although her people are choking on the air)

Takeaway: Sell coal. The charts say you must, and it's time to go long Macy's (M) instead, since gas will drop to $3.25 and the malls will be teaming with Americans deprived for well over 3 months from buying a new pair of shoes. Heck, they'll probably fly to Las Vegas to shop at the Macy's there since the commodity bull is dead. CNBC told me. Die coal die.

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This article has 8 comments:

  •  
    Jul 21 02:56 PM
    Very interesting thesis - coal has had a heck of a run up.
    Reply
  •  
    Jul 21 04:09 PM
    why sell? is my only question here. The thesis IS good, until the surprise ending hits ya...
    Reply
  •  
    Jul 21 04:53 PM
    Great article...up until the last paragraph. Coal will dominate and the evidence in this article is right on. It boils down to the environment vs. the economy and the world economies must recognize this in order to have a leg up in the global markets.
    And Germany is in its own world in terms of alternative energy sources, and they're economy is going to be lagging in the near future. "Germany produced 1,300 megawatts from solar installations in 2007" whereas Dubai will be cruising ahead of them with four 4,000MW coal burning plants. Not to mention the exorbitant price of a producing single solar cell... fools they are
    Reply
  •  
    Jul 21 04:55 PM
    A: sir chasm
    Reply
  •  
    Jul 21 05:01 PM
    C'mon T.M.! can't you see everyone is too stressed out to ferrit out your tongue'n cheek humor??? (insert wry smiley here)
    Reply
  •  
    Jul 22 12:17 AM
    i shouda realized it was toungue-in-cheek humor . ! " The charts say you must" shouda tipped me ~!
    Reply
  •  
    Jul 22 04:52 PM
    Mark, Another great job here. If you have a timeline of more than two days coal will pay off big.

    Yea buy the banks because coal is dead.

    Banks are stinking rotten holes with no earnings and big downside. But CNBC says buy them so it must be done.

    Right before earnings come out on BTU in the morning.. Then suprise!

    Great visibility on earnings and coal goes up!

    Check how ANR had HUGE blocks get sucked up right before the close.

    Something smells and naked shorts should be banned!


    Reply
  •  
    Aug 09 09:19 AM
    I am laughing at the short term fix. Coal in the US will in the near future will have more restrictions and the green movement is here to stay and for now coal is popular in emerging economies simply because it is cheap and plentiful at the moment. I have no doubt that coal will go by the way of the dinousar and its inevitable especially in the US that it will face more and more restrictions and will eventually be extinct. Alternative energy is here to stay and for the moment has taken a minor setback. Silicon unlike coal is more plentiful and makes up one third of the earths natural resources. Silicon because of its recent refining scarcity has slowed down production because of price however that will soon change and with solar cell efficiencies improving it will be head and shoulders a better alternative to coal which for now may be the cheapest alternative but without question is the most harmful to the environment.
    Reply
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