In 2004, coal was a major part of U.S. electricity generation,...

In 2004, coal was a major part of U.S. electricity generation, accounting for 51% of all generated power. The U.S. was one of the largest producers of the resource, second only to China, and though it was a top ten coal exporter, six other nations preceded it. Between 2005 and 2010, only 5% of domestically produced coal was exported. But in 2011, coal-generated electricity dropped to 42%. The U.S. became the fourth-largest coal exporter, doubling exports from 5% to 10% of domestically produced coal. The thing is, the U.S. has a lot of coal. But environmental concerns over the carbon emissions that come from burning fossil fuels like coal have sparked rounds of regulations and restrictions.

In March 2012, an Environmental Protection Agency (EPA) ruling put a limit of 1,000 pounds of CO2 per megawatt-hour on output-based emissions, requiring coal-fired plants to add enough carbon-capture and sequestration technologies to reduce their emissions output by 50%. And though around 70% of U.S. coal plants are more than thirty years old, new ones aren't being built. With ever-tightening regulations in place, it just isn't feasible. Then another competitor began to factor in. In 2012, natural gas prices fell below $2 per mmBtu for the first time in 10 years. Unlike the use of coal, the use of natural gas has been lauded, particularly when it comes to emissions reduction.

By the end of 2012, U.S. carbon dioxide emissions fell 13% from their high of 6 billion metric tons in 2007, now at 1994 levels and moving ever closer to the 1990 level of 5 billion metric tons — a drop that has been attributed, in large part, to a switch by utilities and power companies from coal to the much cheaper, much less regulated natural gas. In 2013, we saw the opposite of this effect. Increasing natural gas prices resulted in a greater use of coal for electrical generation. For the year, coal consumption was up by four percent. Yet coal production still took a hit. Production in 2013 was 4 million tons, or 0.4% lower than 2012, and stockpiles dropped by some 31 million tons. With increased regulations and alternative power sources taking root, coal power plant additions are slowing down. At the current trajectory, coal will experience less growth than wind power very soon. But don't give up on the sector too soon, because there are plenty of reasons for it to keep on going... We Want Coal! Just because coal demand is beginning to wane in the United States (and I said beginning— it still accounts for a ~32% chunk of electricity generation) doesn't mean that the rest of the world has decided to reduce consumption. First of all, we might be experiencing a tight oil boom in the United States, but that doesn't say anything for other nations.

Natural gas prices are as much as three times higher than U.S. prices in some parts of the world, so it's not displacing cheaper coal in those countries. Second of all, developing nations have a growing electricity demand. Nations like China, the world's largest importer of coal, and India, the world's fourth-largest, have populations much more massive than the U.S. and require higher volumes of resources to even brush close to demand levels. In 2011, the U.S. didn't even make the top ten for highest percentage of electricity generated from coal. South Africa had the highest percentage with 93%; Poland followed with 90%. China received 79% of its electricity from coal and India, which has been facing massive power outages and is still unable to provide power to all of its citizens, used the resource for 69% of its power. It's likely that nations like India will increase their coal consumption in years to come; after all, Indian citizens are demanding power the utilities can't provide.

The U.S. and China are still the world's biggest producers of the resource, with China taking the lead. Other major producers are India, Australia, Indonesia, Russia, South Africa, Germany, Poland, and Kazakhstan. But China burns much more coal than the U.S., so it's also the biggest importer. The U.S., on the other hand, sends this production back out in exports. Even if domestic demand is waning, exports are rising. After a decade steady at 5%, exports jumped to 10%. Though the domestic coal market is not what it once was, the U.S. still has plenty of the resource, and there's always somewhere for it to go. Where to Profit Many domestic coal companies are involved in supplying the product for these rising exports. Some of the biggest even have headquarters in other nations, dealing on five or six continents. Peabody Energy Corporation (NYSE: BTU) Peabody is the largest coal company in the world, serving 25 nations and boasting over 9 billion tons of proven and probable reserves. Headquartered in St. Louis, Missouri, the company also has offices in China, Australia, the UK, Singapore, Indonesia, and Germany. It has mining interests at 29 locations in the U.S. and Australia, and it has direct access to Asian and European markets with its international trading headquarters. In 2012, the company shipped a record volume of exports, bringing revenue to a new high at $8.08 billion. Shares lost 31% over the first six months of 2012, when natural gas prices hit their cheapest. In the three months following, however, they jumped back up 19%. The company finished 2013 with $7.01 billion in revenue. Arch Coal (NYSE: ACI) Arch Coal is one of the five largest coal producers in the world. The company has mines in Wyoming, Utah, Colorado, Illinois, West Virginia, Kentucky, Virginia, and Maryland, accounting for 15% of the nation's total coal production. Arch Coal's business is focused on providing low-sulfur and cleaner-burning coal. Also headquartered in St. Louis, Missouri, the company has customers on five continents. Though it's one of the biggies, Arch Coal never recovered from the 2008 crash. Once its stock value began to rebound, it hit another brick wall in mid-2011, it dropped even further. While this would look like the perfect time to buy on its surface, Arch unfortunately has nothing good on the books right now. The company's cash flow appears to be drying up, with a -4x drop from last year. This could be attributed to the company's shrinking profit margins which are also down from last year, hovering around seven percent. Compared to other companies in the sector, Arch has a high debt-to-equity ratio, low profit margins, weak cash flow and poor earnings forecast. Short or avoid. CONSOL Energy Inc. (NYSE: CNX) CONSOL is a unique company in that it is involved in the production of both coal and natural gas—energy sources that, when combined, account for two-thirds of U.S. power generation. This strategy has helped the company to stay in the energy game even when natural gas prices dipped to become more attractive than coal. The company is headquartered in Canonsburg, Pennsylvania, and it's one of the nation's biggest coal producers and the largest producer of underground mines, with 96% of its production coming from underground. Its longwall mining technology helps improve production. CONSOL has 4.5 billion tons of proven and probable reserves, with 18 mining complexes in Kentucky, Ohio, Pennsylvania, Utah, Virginia, and West Virginia. The company's coal production powers 6.5% of the nation's total demand. Unlike Arch, Consol actually improved its guidance for 2014 production based on strong demand in the first quarter for heating coal. Its outlook rose from 30-32.1 million tons of coal up to 31-33 million. Coal Outlook Coal is not doomed simply because demand has changed. Though coal prices to the electric power industry averaged $2.40 per mmBtu in 2012, higher than natural gas's low of around $1.80 in April, prices were around $2.35 per mmBtu in 2013, according to the EIA. Estimates have prices at $2.36 per mmBtu in 2014 and $2.37 per mmBtu in 2015. Natural gas prices, on the other hand, have not stayed at these ten-year lows they hit in 2012. Prices were back up to around $2.40 per mmBtu by May of that year, and in March 2013, they were circling $3.50. By the end of 2013, prices crept over $4.00. The prices, as with most things, are dependent on demand. Winter 2011-2012 was unusually mild, followed by one of the hottest summers in recorded history, so the drop in demand, coupled with a rise in production, contributed to the dip in prices. The wild winter of 2013 drove consumption and prices back up again. Even if coal's percentage of power generation doesn't hit levels it once touched, coal-fired plants are relied upon more when the weather is bad and when natural gas is costly. Exports could taper off slightly this year, the EIA said, if international coal prices fall and demand from China slows, which is likely to happen as a result of slowed growth. U.S. coal is also dependent on the party in the White House, as was evident from stock trends during the 2012 presidential election. Following the first presidential debate during the election, when Mitt Romney voiced his support for coal, coal stocks shot up. Arch Coal received a boost of 6.7%, CONSOL Energy jumped 4.9%, Alpha Natural Resources (NYSE: ANR) went up 5.2%, and Peabody Energy moved up 4.2%. Stocks were also up after the second debate, where Romney again put coal in a positive light. Peabody shares were up 3.63% by the day's close, Arch Coal was up 4.5%, Alpha Natural Resources jumped 8.3%, and CONSOL closed up 2.99%. Obama's "all in" energy plan still leaves a lot to be desired for the coal industry, but election season is approaching once again. The future of domestic coal lies in the hands of the domestic energy plan. Regulations will play a big role in restricting the domestic use, though international growth could spur domestic production and exports. Investors should watch the progression of policies here in the U.S. and abroad, as well as coal and natural gas prices, to stay informed on the future of coal.