Jul

31

QED, from Stefan Jovanovich

July 31, 2015 |

More snark from your 19th century correspondent.

1. The world still runs on the Parsons steam turbine.

2. When the New York Times' readers discover the collapse of the obsolete industry that fuels the brand new age, it is finally time to buy.

Therefore…

Stefan Jovanovich adds:

Rhino Energy LLC is a proxy for the Appalachian and Illinois Basin coal industry. The stock symbol is RNO. We do not own it and it offers zero trading opportunities, but it is the closest I have come to finding a public company that publishes numbers about what is happening in the eastern U.S. coal bidness. The news is terrible, as every reader of the New York times knows. RNO has just suspended its distributions, and its $10 stock from 4th quarter 2014 is now under a dollar. But, even as this particular canary continues falls over in its financial cage, operating margins increase slightly year over year and production is sold out for 2016.

The region now has a number of coal "start-ups" that are completely invisible to the public eye. Their registered public addresses are in and around Lexington, KY. They have taken over some coal leases and lands from the bankruptcies and forced sales of the historic companies that have been part of this depression and opened new mines. They have no legacy union contracts and - more important - no "history". None of the miners who work their operations has any thoughts about being owed anything for all the terrible things Mr. Peabody's company did to them or father or grandfather.

So, we have begun buying shares in Joy Global (JOY) on the Howard Hughes theory of investing - i.e. even as the depression in the oil business continued through the 1930s, people needed drill bits; and with the increase in oil consumption from WW II, they needed even more.

Full disclosure: In 2 weeks we are already down 5%; we expect the happy ending, if any, to come years from now.

Stefan Jovanovich further adds:

I am not an engineer and I don't play one either so these comments are even more questionable than my usual rants. But I did get the short course from my uncle, Aunt Mary's husband, along with the cook's tour of the gas and coal fired steam plants around Denver. Uncle Charley loved the prospect of direct use of gas combustion that Carder mentions. Perhaps because he was old and sick, he also saw the limitations of the brave new world he would not live to see.

Uncle Charley's lesson plan for his idiot nephew.

Coal is a poor competitor in HHV values. Where gas on average has 21k HHV BTUs per pound, lignite coal has only 8k and the highest grade coal - anthracite - 14k. On average the bituminous coal used for steam generation has only half the HHV/pound of natural gas. So, coal per pound has to be half as expensive as gas simply to break even on HHV efficiency.

That still leaves the efficiency of the turbines–steam vs. the CCGT. According to thermodynamicist folks at Mankato State steam turbines using coal can do close to 50% at best while CCGTs are, as Carder says, now at 60%. So, coal per pound has to be another 1/3rd cheaper still in order to stay even with gas on efficiencies alone.

Then there are the environmental costs, nephew. Put them all together and coal has to sell for no more than $.25 a pound when gas is at a dollar.

So people will stop building steam generating plants in North America and the rest of the world will keep building them because coal delivered by ship or barge can be had for fixed contracts for a decade @ 1/4th the price of current prices for gas while no one will be willing to bet on natural gas deliveries beyond a year or two at most.

I checked Uncle Charley's numbers before buying JOY.

the U.S. I.E.A. price history for residential natural gas

The current futures price for gas - $2.89 per 1m BTUs which converts to roughly $.09 per pound at the standard prssures and densities - and coal - $43 per ton or slightly more than $.02 per pound.

If Carder is right and Uncle Charley and I are wrong, natural gas suppliers will be willing to offer long-term supply contracts the way people in the oil bidness did before 1973; if Uncle Charley is right, California will have brownouts and demand the right to buy Kentucky coal fired wholesale power before the decade is out. We shall see.


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