China Burns Half of World's Coal - Good or Bad for U.S. Producers?
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According to a new report, "BP's 2013 Statistical Review of World Energy," China consumed just over half of the total coal burned on the planet in 2012. Consumption was up 6.1% for the year:
"The Asia Pacific region, which includes China, India, South Korea, Japan and Australia, accounted for nearly 70% of the world's coal use in 2012. China alone accounted for more than 50% of global coal use for the first time ever..."
In the U.S., lower natural gas prices caused coal-to-natural gas switching in 2011 and most of 2012. As a result, domestic coal consumption fell by almost 12% last year. Increasingly, all eyes are on U.S. exports of both thermal and coking coal. 2012 was a record year for exports, coming in at 126 million short tons. Without continued strength in exports, domestic coal prices will remain at depressed levels for an extended period.
China Waxes and Wanes Without Warning
Even if the industry continued to see robust exports, which unfortunately is not the case as exports are slowing, China's increasing dominance of the seaborne coal trades cannot possibly be a good thing for U.S. producers. China has been and will likely continue to be a wildcard. In some months China appears to have an insatiable appetite for imports. At other times, China's absence from the seaborne market causes coal prices to swoon.
A big problem for U.S. producers is location, location, location. Several major coal exporting countries are better situated to export coal to China. Australia and Indonesia are the largest exporters in the world, Australia especially in coking coal and Indonesia in thermal coal. Colombia and South Africa have better transport logistics to a key importing market, India. Taken together, an emerging block of countries, most notably Mozambique, are moving up the export curve as well.
Make no mistake, when global coal prices are robust, everyone can make hay. In fact, the U.S. has enjoyed strong exports, more so to Europe and South America than to Asia, for the past three years. However, as I mentioned, exports in 2013 will be less than 2012, and 2014 is highly uncertain. Exports aren't expected to collapse, but what producers really need is a 10%-15% increase, per year. However, the EIA is forecasting a 10% decline in 2013 vs. 2012.
Huge Powder River Coal Basin Doomed Without More Export Capacity
In the Powder River Basin, "PRB" of Wyoming and Montana, Peabody Energy, Arch Coal (NYSE: ACI) and Cloud Peak (NYSE: CLD) desperately need new port facilities on the west coast to export to Asia. In order for PRB coal pricing to improve meaningfully in the coming years, new west coast and Gulf of Mexico ports need to be opened. The industry needs an extra 50-100 million tons of capacity, AND demand for those exports! That's a lot compared to the EIA's export forecast of 112 million tons in 2013.
Yet opposition to new ports is strong and timelines are long--and getting longer. In May, a prospective port from Kinder Morgan was scrapped. Last year there were six planned port projects in the Oregon & Washington State region. Now there are three. Arch and Cloud Peak have resorted to shipping coal through the west coast of Canada, hardly a long-term solution.
Speaking of Canada, Teck Resources (NYSE: TCK), the second largest coking coal exporter in the world behind BHP (NYSE: BHP), has a long-standing relationship with Asian customers. Teck has dual rail lines and two primary west coast Canadian port facilities locked up for many years to come. As such, Teck is a well-entrenched player that is very hard for U.S. producers to compete with.
Combined with its long-term Japanese JV partner Mitsubishi, BHP is by far the largest premium hard low-vol coking coal exporter in the world. BHP ships almost all of its coking coal from the Bowen Basin, in Queensland, Australia. Needless to say, the east coast of Australia is a lot closer than either coast of the U.S.
China's dominance in coal consumption, not necessarily worthy of bragging about given the associated environmental concerns, is not likely to change anytime soon. This is not good for U.S. coal producers who suffer from a transportation disadvantage into Asia. In good times, everyone wins, but the coal market is not experiencing good times. It's difficult to name any good reasons to own coal stocks at this time.
The coal industry in the United States has been in a state of flux since the arrival of a cheaper alternative for energy production: natural gas. Exports are becoming a much bigger part of the domestic coal landscape, and Peabody Energy has deals in place to get its cheaper coal from the Powder River and Illinois basins to India, China, and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is perhaps most worthy of your consideration. Don't miss out on this invaluable resource — simply click here now to claim your copy today.
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