Thermal Coal Glut Sinks Mining Companies
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The shale gas boom currently underway in the United States has had vastly different effects. Take the petrochemicals industry, for example. Here cheap and plentiful shale gas and shale liquids such as ethane have had extremely positive effects, turning the US into the second lowest cost region on the globe for production, trailing only the Middle East. As detailed in a previous article, this is actually leading petrochemical companies to opening large new plants right here in the United States.
However, quite the opposite is true for another industry...coal. The glut in shale gas, which sent natural gas prices to a decade low, has also sent domestic coal prices to a two-year low as utilities have switched to the cheap, less polluting fuel. In fact, the share of electricity in the US generated by coal has fallen to a 40-year low according to the US Department of Energy. And unfortunately for the domestic coal industry, the changeover by electric utilities looks likely to be a long-term structural change.
This in turn has caused ripple effects around the globe since thermal coal is a key factor in profitability for many global mining companies. The effect is especially keen for pure-play coal mining companies such as Peabody Energy (NYSE: BTU), Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR). Arch and Alpha are the largest domestic producers of thermal coal and they have seen the benchmark central Appalachian thermal coal price plummet from $70 a metric ton at the start of the year to around $54 a ton recently. The stock prices of some domestic coal mining firms, following coal prices down, has plunged up to 90 percent over the past year.
The one bright spot for US coal companies has been exports. Net US coal exports last year surged to 94 million tons, with much of the coal headed to Asia. The 94 million tons is up an astonishing 600 percent from just five years ago and is the highest level of exports since 1991, according to the National Mining Association.
But there is a problem here too. The surge of US coal exports to Asia came just as producers in the Asia region had ramped up their thermal coal output in order to meet demand from China in particular. And indeed, Chinese coal imports in the first five months of 2012 rose above 90 million tons, up about 60 percent from 2011 levels. But with the Chinese economy cooling, much of the coal imported is now sitting in inventory which will crimp future demand. This will in particular hurt Peabody Energy which has been adding Australian coal assets to its portfolio in recent years.
This glut of thermal coal is causing prices around the world to sink. In Europe, where the debt crisis is hitting demand, the price in Rotterdam has hit a 2-year low at $82 a ton. The price in Asia is higher, but not much, with Newcastle (Australia) coal trading currently at about $87 a ton. For reference, thermal coal prices hit a record in 2008 of $220 a ton before plunging to a low of $61 a ton in March 2009 following the financial crisis.
Of course, these prices are still approximately $30 a ton better than US prices so US coal companies will continue their export push. Which takes us back to the ripple effects mentioned earlier. This is not good news for some of the global mining giants which have a large presence in thermal coal such as Anglo American PLC ADR (NASDAQOTH: AAUKY.PK) and Xstrata PLC ADR (NASDAQOTH: XSRAY.PK). Xstrata, by the way, is the world's largest exporter of thermal coal and thus the macro outlook for coal can greatly effect its bottom line.
Both Xstrata and Anglo American though remain optimistic that China's economic growth and demand in electricity will regain strength in the medium- to long-term. The CEO of Anglo's thermal coal division, Norman Mbazima, said recently “there is very good demand outlook for coal. Coal will continue to be the mainstay of electricity production in the world and this will underpin good prices into the future.”
It remains to be seen whether Mr. Mbazima will prove to be a good forecaster. At least, his firm and the other large global miners are not solely reliant on coal. The same cannot be said of the aforementioned US coal companies. This sector should be avoided at least until the gas companies slow down their drilling for and production of shale gas. When this happens, gas prices will rise again and coal will once again become more competitive.
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