Coal is far from a favorite fuel these days, despite its abundance. No matter how much we scrub it, we simply can't make it turn green. That being said, the world still uses a whole lot of coal. In fact, over the past 10 years, coal consumption has grown by an average of 4.4% annually, making it the fastest-growing fossil fuel.
According to BP's "Statistical Review of World Energy 2013," last year China accounted for 50.2% of global coal consumption. Overall, the Middle Kingdom used 1,873.3 million tonnes oil equivalent of coal. For perspective, the U.S. used 437.8 million tonnes oil equivalent last year, which was just 11.7% of the world's total and a drop of 11.9% year over year. Both countries are larger coal customers than Santa Claus, as it's estimated that the big guy gives out only about 10,000 tons of coal each year to children who misbehave.
Going back to China's dominance of the coal market, last year its consumption grew by 6.1%, while demand across the rest of the world declined by 4.2%. That meant China accounted for all of the net growth in global coal consumption last year. That means the coal industry is seriously at risk if China's growth slows down, which is why investors need to watch it very closely.
Many coal producers have pegged their hopes on coal's international growth. Peabody Energy (NYSE: BTU ) for example, purchased coal operations in Australia a couple of years ago to better position the company to take advantage of demand growth in the region. Further, the company, along with peers including Arch Coal (NYSE: ACI ) , have inked coal export agreements with Kinder Morgan Partners (NYSE: KMP ) to get U.S.-produced coal to the global marketplace.
Source: Peabody Energy (Coal export terminal in Australia).
Exports have been important for Arch, which set a record last year with 13.6 million tons of coal exported, nearly double the 7 million tons it exported in 2011. The company hopes that new export terminals from Kinder Morgan will help it increase its exports fourfold by 2020. Overall, exports contributed well over $10 billion in revenue to U.S.-based coal companies.
That being said, increasing export capacity hasn't been easy, as Kinder Morgan recently had to drop plans to build an export terminal in the Pacific Northwest, because of opposition from environmental groups. That, however, hasn't stopped the midstream giant from spending more than $400 million to expand its coal export terminals elsewhere. In addition to building coal export terminals, Kinder Morgan recently announced that it will purchase its own coal reserves, which it will lease to producers and collect royalties. It's a move that could backfire if Chinese demand slows down.
Other companies that could be pinched if China begins to wean itself off coal are global mining giants BHP Billiton (NYSE: BHP ) and Rio Tinto (NYSE: RIO ) . Both have coal operations in Australia that are strategically positioned to benefit from Chinese demand growth. BHP is being particularly cautious on coal, as it's not investing in any new coal projects while cutting about $800 million in overall costs in its coal business. Meanwhile, Rio Tinto is looking to divest upwards of $3 billion in coal assets in a move to rid itself of some of its smaller and less-profitable assets.
China's appetite for coal really is the cornerstone of the industry right now. However, hopes within the country are that it will be the largest producer of renewable energy one day. Not only that, but it has massive untapped shale oil and gas reserves, which could help it balance its energy demands. That's why coal investors need to watch to see if demand growth slows, because it could be the canary in the coal mine to warn investors that coal's biggest customer is about to slow its spending, which could really affect producer profits.