Coal gains on oil as energy investment

Coal hit a 10-month high of US$66.83 a ton in March, although it has eased by just over $4 a ton since. Picture / Glenn Jeffrey

NEW YORK - Coal, the hard, black byproduct of fossilised plants used as fuel since China's Western Han dynasty 2000 years ago, may overtake oil as the best-performing energy investment, a range of analysts believe.

Because "coal is the cheapest, most abundant energy source", from North America to China, "the surge in oil has encouraged people to plan new coal-fuelled power plants and to start using conversion technologies such as coal-to-diesel", said Richard Price, of Westminster Securities in St Louis.

Wilbur Ross, the 68-year-old chairman of International Coal Group, is convinced the search for a cheaper alternative to oil and natural gas will enable coal to outperform oil.

Coal was poised to top its recent highs because of record oil and natural-gas prices, said Francisco Blanch, from Merrill Lynch in London.

In Europe, coal was US$62.55 ($100) a ton last week and reached a 10-month high of US$66.83 in March, broker ICAP said.

Prices paid by US utilities would climb 5 per cent in the next year and double by 2021, said Price.

Converting coal into liquid fuel or natural gas becomes economical when oil remains above US$40 a barrel, said Stephen Leer, chief executive of Arch Coal, the second-largest US producer.

Oil has not traded below US$40 since June 2004 and will fall 19 per cent next year to US$60, analysts forecast.

The US has enough coal to last almost two centuries and today imports two-thirds of the oil it uses.

Using more coal is part of President George W. Bush's initiative to make the country less dependent on imports.

The US Energy Department said the country would build plants that increased coal's share of fuel used to generate electricity to 57 per cent from 50 per cent today.

St Louis-based Peabody Energy says it needs Government-backed loans to build coal-to-liquids plants, each estimated to cost $4 billion, near its deposits in Montana and Illinois.

Africa's biggest company by market value, South Africa's Sasol, which developed coal-to-liquids technology, has won the endorsement of the airline industry for a jet-fuel mix half derived from coal.

China, which has tripled oil imports in the last five years, has enough coal for 100 years. Royal Dutch Shell, Europe's second-largest oil company, and Sasol are investing in plants in China with domestic coal companies.

However, investors value coal reserves at a fraction of oil deposits. That gap might narrow, raising the value of coal relative to oil, as more plants were built that allowed coal to compete with oil, one analyst said.

Although the recent drop in coal prices has depressed shares of producers, "that kind of a meltdown creates a lot of buying opportunities", said Houston coal analyst James Rollyson. "It's a short-term weakness because coal is the fuel of choice going forward."

- BLOOMBERG