Why Are We Importing This Carbon-Spewing Fuel From Russia?

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Russia is once again pushing the envelope on the world stage. The United States and its allies have placed increasingly stringent sanctions on the country to try to change its ways. So why was New Hampshire's largest utility so desperate for fuel that it did a deal with the country anyway?

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When Bloomberg contacted Public Service of New Hampshire about the purchase of nearly 40,000 tonnes of thermal coal from Russia for its Schiller power plant, the response was, "A shipment of coal was contracted from Russia that met our operational and economic needs." That terse reply is hardly surprising given that the United States is one of several nations imposing sanctions on Russia for its involvement in Ukraine and annexation of Crimea.

(Source: Richard Freeman, via Wikimedia Commons)

For the most part, those sanctions have targeted the oil industry. But Russia is no slouch when it comes to coal, holding the world's second largest reserves of the cheap, but dirty, fuel. That said, the United States has the world's largest reserves, roughly 50% more than runner up Russia. There's little doubt that coal is out of favor domestically, but why would New Hampshire do a deal with a country that we are trying to isolate when there's plenty of coal on its home turf?

Would you believe that answer is trains? U.S. coal miners like Peabody Energy , Arch Coal , and Cloud Peak Energy would love to sell New Hampshire the coal it needs, but it can't because of delivery delays on the rails. Although it's more complicated than this, the basics of the situation are that the extra cold winter last year caused rail problems that have yet to be resolved.

In fact Peabody Energy CEO Gregory Boyce noted in his company's second quarter conference call that, "We estimate that 15 million tonnes of [Powder River Basin] shipments have been missed in the first half of the year due to the low power rail performance and utility coal conservation measures due to inadequate deliveries." This despite the fact that utility stockpiles of coal from that low-cost region were down 30% year over year, "a dramatic improvement over the last few years as the inventory overhang has been removed."

In other words, coal should be doing better. Only Peabody spokesman Vic Svec points out a tiny problem: "While utilities are relatively low on supplies they're not bidding into a market for coal they can't get delivered." Seriously, why buy something you can't get? Instead, utilities are being forced to cut back on coal use to help ensure they have enough to last the upcoming winter! That, by the way, is increasing their use of natural gas, which in many cases costs more to burn—keep an eye on your electric bill; it might be going up.

(Source: Public domain, via Wikimedia Commons)

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So, New Hampshire's deal with Russia is basically a way to get fuel that it couldn't get domestically. And even though it required working with a country that's on the verboten list, ensuring the lights stay on throughout the winter basically required working with the "enemy." Not ideal, but you do what you have to.

Interestingly, however, Peabody Energy provided a coal market update in mid-September that was notably upbeat. "Powder River Basin demand remains strong as it is competitively advantaged to natural gas generation at gas prices above $2.50 to $2.75/mmBtu, and improving rail performance is expected to result in higher Powder River Basin demand in 2015." Moreover, "Based on recent transactions, Peabody is now signing Powder River Basin contracts at materially higher levels than published indices that are not reflective of physical markets."

So at the very same time that there's blood flowing on Coal Miner Street, Peabody is starting to talk about things getting better for the Powder River Basin (PRB). That's good news for Peabody, though it has notable exposure to the weak metallurgical coal market, too, which will keep results weak.

Cloud Peak, however, only mines for coal in the PRB. And while it lost money in each of the first two quarters as rail delays took their toll, it had managed to stay in the black prior to that despite the broad industry downturn. Cloud Peak could be worth watching here.

New Hampshire's Russian deal shows coal is not out of the woods yet, but if you can stomach buying when everyone else is scared, now could be a good time for a deeper dive in the unloved coal sector.

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The article Why Are We Importing This Carbon-Spewing Fuel From Russia? originally appeared on Fool.com.

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