Good News in the Coal Space?
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The coal news has been dismal of late -- benchmark coking coal prices below $170 per metric tonne, natural gas prices dipping back to $2.75 per MCF, pessimistic commentary by global miners about a China-led recovery in the second half. All year investors have been waiting for China to turn the corner. It ain't going to happen in August or September. So, when I see encouraging news, I figure I better get right on it.
On Aug. 15 there was not one but two positive news items. First, government officials in China announced a country-wide curtailment in coal production:
"...China cut coal output targets at the top three producing regions by as much as 7 percent from a year ago to ease a supply glut caused by a slowdown in economic growth, which has also weakened global prices.The National Development and Reform Commission (NDRC), a top government economic planning agency, set China's total coal output for 2012 at 3.65 billion tonnes, an increase of just 3.7 percent from year ago and a deceleration from the 8.6 percent growth of last year and 9 percent the year before, according to a statement from Reuters on Wednesday."
In just the past few weeks there have been reliable reports of production cuts in Australia, Russia and Indonesia. Here's a blurb from coalguru.com:
"It has been reported that Russian miners have already started following their US counterparts in cutting coal production, as depressed prices in the export market seriously challenge profitability. Indeed exporters a few weeks ago estimated a potential loss of between 6 million tonnes to 8 million tonnes of exports owing to the reduced output."
And this from Platts:
"Indonesia's second largest thermal coal producer, Adaro Energy, said late Tuesday it has lowered its 2012 annual production forecast to 48 million-51 million mt, from an earlier forecast of 50 million-53 million mt, amid difficult market conditions."
"Some small and medium Indonesian coal producers have started to slash production to cope with the continuous price fall amid weak global markets. Several medium coal companies with annual production capacity of 2-4 million tonnes have planned to cut production by 30%-40%."
Adding China to the list of countries cutting back is potentially a big deal. Historically, whenever China curtails domestic production, imports into the country increase. That's because all else equal China would prefer to preserve its reserves by importing coal if possible. Even if China's imports don't jump higher, domestic prices will find support, which will help balance prices in the region.
Positive News from, of All Places, Central Appalachia?
Have rumors of central Appalachia's "CAPP" death been greatly exaggerated? The second piece of positive news is that an Indian company plans to import up to 9 million tons of thermal coal per year from mines in Kentucky and West Virgina. Two private companies, Booth Energy Group and River Trading Co., have signed a 25-year deal. Importantly, Booth and River Trading will not supply the entire 9 million tons; other producers in the area will be tapped as well.
Time will tell how important these news items turn out to be, but they are unambiguously positive. CAPP producers that stand to benefit include James River, (NASDAQ: JRCC), Alpha Natural Resources, (NYSE: ANR), Arch Coal, (NYSE: ACI) and Consol Energy(NYSE: CNX). James River has perhaps the most to gain. CEO Peter Socha has been to India and has talked about it on earnings conference calls. If Socha can contract some coal into this deal, that could really move the needle for a relatively small company.
Alpha could benefit in a number of ways -- they could sell to the Indian group directly or back-fill tons that are exported by peers. Alpha has been aggressively closing higher cost CAPP mines all year. At the margin, if a few extra million tons of thermal production remain in-the-money, that would help the segment's unit costs.
Arch is much bigger out west in the Powder River Basin, but like Alpha it may benefit from direct sales or back-filling. Stronger CAPP prices would help Arch build out its CAPP coking coal platform. Although Consol is mostly in northern Appalachia, increased exports off the East Coast could help them as well. Consol owns the port of Baltimore. Increased throughput would add to Consol's consistent revenue growth at the port.
Not to beat the dead horse again, but positive news in the coal sector has been hard to come by. Domestic coal prices may not jump tomorrow or next week, but every little bit of support helps. If other Indian buyers are at the table, a few more deals like this could make all the difference.
MockingJay2011 owns shares of Alpha Natural Resources and CONSOL Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
