Expect Coal Producers to Stay Deep in the Black

This is the year when the first baby boomers have become eligible for Social Security; hold your applause. This generation remembers not only the duck-and-cover routine for foiling Russian ICBMs, it remembers various points of propaganda about how we should eat two eggs a day, drink plenty of whole milk and be proud of living in various ages. Yes, we were in the Oil Age, the Atomic Age, the Steel Age and the Coal Age, among others.

What were we taught about coal? Well, there was that whole Industrial Revolution thing, replete with steam engines, belching locomotives, spinning jennies and other wonders made possible by burning coal. Less emphasis was placed on soot, sulfur dioxide, particulate and mercury emissions, underground mine cave-ins, strip mining and the worst labor relations this side of Major League Baseball. Carbon dioxide emissions were not even on anyone's radar screen.

Once the first energy crisis of the 1970s hit, we were told that America was the Saudi Arabia of coal; this presumes, of course, that we should want to be the Saudi Arabia of anything. But even with coal always providing half or more of the fuel for electricity generation, and with coke, a coal derivative, being required for steel production, coal mining never was a glamorous or particularly profitable business. And let's just say we never have internalized coal's massive environmental costs.

Substitution at Last

None of the fossil fuels, which include petroleum and natural gas along with coal, are very good substitutes for each other, for reasons discussed in January 2006, but their rise in price is changing that. That has been the case between natural gas and petroleum products, and now it is the case between coal and natural gas.

As the commodity becomes more valuable, the price to the producer captures a greater share of overall value relative to the transportation chain's share. The coal business over the years has been a railway business and has provided the baseload for carriers such as Union Pacific (UNP - commentary - Cramer's Take), CSX (CSX - commentary - Cramer's Take), Norfolk Southern (NSC - commentary - Cramer's Take) and Burlington Northern Santa Fe (BNI - commentary - Cramer's Take).

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At the time of publication, Simons had no positions in stocks mentioned.

Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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