Fluctuation in the coal
consumption of U.S. electricity generators greatly affects Peabody Energy’s
(BTU) sales since about 75% of its total sales volume is purchased from these
generators. The current year is expected to be better for U.S. coal miners because
the share of the U.S. electricity generated by coal is expected to increase to
40.2% from 39.1% in 2013. The reason for this is due to the rise in natural-gas
prices that will in turn boost coal demand. However, this rebound is only
short-term, as many coal-fired plants are expected to shut down or switch to
natural gas in the coming years due to the EPA’s anticipated new mercury and
air toxic standards, and air pollution rule. President Obama’s Climate Action
Plan has instructed the EPA to draft regulations for modified, reconstructed,
and existing power plants by June 1, 2014. By 2020, about 60 gigawatts (GW) of
the U.S. coal fired electricity is expected to be retired, which is about 18%
of the current coal-fired electricity generation capacity of the country.
The fall in coal demand for
electricity generation will affect Powder River Basin (PRB) coal miners such as
Peabody and Cloud Peak Energy (CLD), as they account for 40% of U.S. coal-fired
electricity generation. To offset weak domestic sales, these companies want to
capitalize on growing demand in Asian countries such as China and India. In
five years, the world’s coal demand is forecasted to grow by 1.2 billion tons,
and more than 80% of it is expected to come from India and China. Both India and
China plan to increase their coal-fired electricity by 70 and 200 GW,
respectively.
The disadvantage with PRB
mines is that they are in a landlocked region, which makes exporting coal
difficult. However, seeing the potential increase in export volumes, Gateway
Pacific Terminal, a marine terminal, has been proposed in Northwest Washington.
Both of the terminal developers — SSA Marine and BNSF Railway, are
port-operating companies. Ideally, coal from these mines will be delivered to
the terminal through BSNF trains, and then will be carried to Asian countries
via terminal shipment. Both Peabody and Cloud Peak have already signed deals
with SSA Marine to export up to 24 million and 16 million metric tons annually,
respectively, through this terminal.
Yet, the Gateway Pacific
Terminal proposal is still in the approval stage. A study on the terminal’s
environmental impact is expected to start next month, and it may take between
13 and 16 months to complete. There are two factors delaying the terminal
development. One is the environmental impact of increasing rail traffic in the
region. Another is cultural; the terminal site has for years been identified as
culturally significant, and local tribes oppose the proposal. So far, there is
no agreement on the issue, and no deadline has been set to reach an agreement.
Hence, there is a lot of
uncertainty regarding the terminal’s development, and it is still unknown
whether it will be constructed. Peabody, Cloud Peak Energy, and other coal
miners’ potential export to Asia depends on the fate of the Gateway Pacific
terminal, as without a nearby port facility it will not be feasible for these
companies to increase export sales.
Global Operations Appear
Promising
Peabody can capitalize on
potential Asian demand through its mines in Australia. To increase its sales in
China, Peabody is expanding joint ventures with Chinese coal companies.
In December, the company
entered into a joint venture with China’s Shenhua Group Corp. Ltd (CSUAY) in
Singapore to form the Sino-Pacific Coal Trading Corporation. Both Peabody and
Shenhua will have equal partnership in this company. Sino-Pacific will supply
thermal coal to Shenhua. This coal is mainly used in power generation from
Peabody’s global operations and also from its coal-trading platform. This
company is expected to begin operation this year.
Shenhua Group is one of the
world’s largest thermal-coal importers as it has about 65 million kilowatts, or
65,000 megawatts (MW), of installed power-generation capacity. Last year, in
the first nine months, Shenhua Group imported 9.9 million metric tons of coal,
an increase of 52% from 2012. A similar trend is expected this year as well
because Shenhua is increasing its power-generation capacity year over year.
Complete details of the deal are not yet disclosed, but by entering into a
joint venture, Peabody will get a priority position as a major supplier to
Shenhua’s coal requirements.
The joint venture with
Shenhua will increase Peabody’s sales this year, and the company is trying to
enter in other similar joint ventures in China to capitalize on the country’s
rising coal demand.
Conclusion
This year, U.S. electricity
generation through coal is expected to rise marginally, which will improve
Peabody’s sales. However, this rebound will only last a short period since many
coal-fired power plants are shutting down. Because of weakness in domestic
demand, the company is planning to increase its export volume, but the Pacific
Gateway terminal, the port through which it has plans to export, is still in
approval stage with no definitive date to begin operations.
About MissionIR
MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.
Sign up for “The Mission Report” at www.MissionIR.com
MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.
Sign up for “The Mission Report” at www.MissionIR.com
Please see disclaimer on the MissionIR website http://www.missionir.com/disclaimer.html
