My One Problem with The Godfather

The Godfather is perhaps the all time greatest movie. It's perfect on almost every scale. It has everything you would want from a great movie: a great cast, great acting, great soundtrack, great story, violence, sex, I could go on and on.

My one problem with the movie is Lucy Mancini. She's not hot. Sonny is supposed to cheat on his wife with Lucy? Are we really supposed to believe that? This has been my one qualm with the movie. The casting of Lucy was not done well.

The Future of Coal

Recently, Alpha Natural Resources (ANR) acquired Massey Energy Co. (MEE) in a deal that has significant implications in the coal market. This capped an interesting week in the world of coal which saw Rio Tinto’s offer to take over Riversdale backed, Mobil-Exxon predicting natural gas to overtake coal by 2020, and Chevron getting out of coal all together. These news events signal a mixed outlook on the future of coal with some companies looking at alternative resources whereas others are looking to strengthen their position in the coal market. Looking at all these events, it is possible to get an outlook for the future of the coal market.

The Massey Acquisition
Regardless of what the future is, coal is a significant resource today, since it has many uses. Coal has various grades which contribute to its different uses. It is a significant source of electricity; 40 percent of the world’s electricity production comes from coal. The world’s two biggest economies, China and the United States, both consume a large portion of coal for electricity. There is a strong demand for the resource. Coal is also used in the blast furnace for smelting iron, another important mineral commodity to industrialized nations. Furthermore, since coal can be liquefied into gasoline or diesel, it is seen as a backstop technology to limit price escalation in the oil market.

The acquisition of Massey by Alpha Natural Resouces brings America’s third and fourth largest coal producers together. Under the terms of the agreement, Massey stockholders will receive 1.025 shares of ANR stock and $10 for each stock of Massey Common. This represents a 21% premium on Massey’s share price, but the deal should see ANR, with its 5 billion tons in reserves, become the US’s second largest coal producer, leapfrogging Arch Coal, and the third largest producer of coal in the world. The cash and stock deal is valued at $7.1 billion and should help ANR become a significant player in the metallurgical coal market.

Because metallurgical coal is a factor of production for industrial, manufacturing, and steel industries, the deal should put Alpha Natural Resources in a strong position. With emerging markets, like India, China, and Brazil, the demand for steel and other goods should be high. This should help sustain the demand for coal. ANR is putting themselves in a strategically solid position.

Riversdale Takeover
Rio Tinto is one of the world’s largest mining and resources companies, so an attempt to acquire a coal mining company should not be a huge surprise. The large majority of Rio’s coal operations are geared towards thermal coal. With its bauxite refinement and iron ore production, it makes sense for Rio to acquire a company whose resources can contribute directly towards another subsidiary’s factor of production. Perhaps more significant, however, is that magnitude of the resources they are acquiring.

Not only is Rio making an attempt to shift much of its coal holdings from thermal to coking, but they are also adding greatly to their potential production. As of 2008, Rio only produced 153,111 tonnes of coal. The Riversdale acquisition could substantially increase the production numbers, so not only is Rio getting more coking coal resources, but they are increasing their stake in coal mining. This, however, is by no means a done deal.

Just like Rio, there are two steelmakers, who are substantial holdings of Riversdale, with interests in coking coal. India’s Tata Steel owns 24.2 percent and Brazil’s CSN owns 16.29 percent. While the board representative from Tata backed the offer, Riversdale has made it clear that this does not mean that Tata Steel will sell it share of Riversdale. Obtaining Riversdale would be a strategic coup by Rio, both finding a resource to help itself and taking away a resource from a competitor.

Mobil-Exxon Prediction and Chevron’s Exit
Exxon-Mobil has made a bold call by suggesting that natural gas consumption will overtake coal by 2020. To put that in perspective, the International Energy Agency does not see that happening until 2035. As preposterous as it sounds, there is a method to Mobil-Exxon’s madness as trends in the market suggest that they may just be right.

Cheap prices have not discouraged exploration and production companies from raising supply, but the key to gas’s role in the future will be dependent on demand. The thought is that natural gas will make its leap in the power generation market. This sector accounts for 34 percent of US gas demand. While coal dominates this category, tightening environmental regulations could push power companies towards natural gas because it is a much more efficient source of energy. The shift away from coal seems to already taking hold.

Chevron Corp announced that it will be leaving the coal industry, stating that clean coal technology is too far away. This relates directly to Mobil-Exxon’s prediction that companies will look for cleaner energy sources. Clean coal technologies are technological developments aimed at reducing the environmental impact of goal energy generation. Since coal is one of the leading causes of climate change, there has been an initiative in the industry to find ways to limit the environmental impact. Although Chevron only produced 10 million tons of coal last year, it is significant that the energy giant is leaving the industry.

The Future of Coal
The coal market as a whole will be sustained so long as there is a demand from steel, manufacturing, and other industrial industries. However, coal as a source for electricity production might have a less certain future. With growing regulatory burdens, the demand for clean coal technology is at an all time high. How viable is clean coal technology? How long will it take for these technologies to develop? How much more efficient will these technologies be?

These lingering uncertainties must be sorted out in the near future for coal to survive as a source for electricity production. If these technologies do not make substantial reductions in the environmental impact or take too long to develop, these companies will look at alternative sources that are more efficient and less harmful the environment. This will have a spiral effect on the price and supply of coal because as demand goes elsewhere, prices will drop making the extraction of coal reserves uneconomic. A price drop would have a precipituous effect, not just on these coal companies, but the many miners who would lose their jobs.

All of these news events, in a way, suggest this trend away from coal as a source of electricity production. Both of the takeover/mergers seem to be motivated by a desire to further a stake in the coking coal industry that is tied with the steel, manufacturing, and industrial industries. The moves would help the companies strengthen their position in those markets. Exxon-Mobil's shunning of the coal industry and Chevron's departure from the coal industry is an indicator of what the future of the industry might hold.