Coal Companies That Could Be the Big U.S. Exporters to China

 |  Includes: ACIIQ, ANRZQ, BTUUQ, CNX
by: David White

The U.S. has been called the "Saudi Arabia of Coal" with 238 billion tons of proven reserves. Yet green factions in the U.S. are fighting against its use with some success. Many coal plants are being closed down, especially the older, dirtier ones. With all of the new natural gas discoveries in the U.S., many are pushing the conversion to natural gas fueled power plants. They produce half as much carbon dioxide as coal and they do not cover things with coal soot as loose coal does on a windy day. The coal companies are fighting against the green groups with some success. There is clean coal technology. Yet they still realize their best bet is to start shipping their coal to China, India and other developing companies. Even in this they are having to fight the green groups to allow them to establish new port terminals. Sufficient port facilities for shipping coal to allow for the desired expansion of shipping to China, etc., do not exist. The green groups are opposing expansion. Still this is likely a losing battle. The U.S. needs to export (to balance trade) and it needs more jobs.

Several companies have taken the lead with regard to coal terminals. Consol Energy (NYSE:CNX) already has a major terminal in Baltimore, MD. It can transport coal to there by train. Once the coal is loaded on ships, it can be sent to China, India, etc., around the Cape of Good Hope. The shipping costs are not that high, CNX is likely to ramp up this business quickly as China’s (and others‘) demand for coal increases.

Perhaps the most desirable coal for the Chinese is the Powder River Basin coal. This is low in sulfur and ash and it is fairly high in energy content. It can be further treated to increase its BTU content per ton by removing water, etc., for about $10/tonne. This coal can then be sent by rail to ports on the West Coast of the U.S. and Canada (usually Vancouver). All one had to do was to look at the pollution during the Beijing Olympics to know that the Chinese have to worry about pollution too. They will want this “cleaner,” high energy content coal.

Some of the coal companies are in the process of investing in new terminals for shipping coal to China, etc. These companies are likely to be the earliest ones to benefit in the future. Plus these actions speak well of their management. Peabody Energy (BTU), the world’s largest coal company, on Feb. 28, 2011 announced plans to export 24 million tons of coal from a large new shipping facility at Cherry Pointe (north of Bellingham, WA). On Jan. 18, 2011 Arch Coal (ACI) announced it had reached an agreement with the Canadian Crown Ridley Terminals, Inc. in Prince Rupert, BC to export 2.5M tones of coal annually. Arch Coal company officials said that the Prince Rupert facility could be expanded to handle as much as 24 million tons annually. Arch Coal also took a 39% equity interest in Millennium Bulk Terminals, which owns a port on the Columbia River near Longview, WA. Under the deal, Arch Coal would control 39% of the terminals throughput and storage capacity. Once the permits are all obtained (and some minor upgrades made) ACI would be able to move 5 million tons of coal per year through the Millennium terminal. There is further talk that Ambre Energy, the parent of Millennium Bulk Terminals, has covert plans to expand the terminal’s capacity to 80 million tons per year. Per the above mentioned agreement, that would give ACI a capacity of 31.2 million tons per year through this terminal. Ambre Energy is also planning to export significant coal.

Alpha Natural Resources (ANR) with its recent buy of Massey Energy for $7.1B also seems to be gearing up to export coal, especially metallurgical coal. I have not heard of any new terminals being sought by ANR. However, there are already nine East Coast terminals. ANR may be able to avail itself of these. Plus CSX Corp. recently confirmed plans to begin moving coal out of Philadelphia this year and out of South Carolina by 2013 through third-party facilities. This should add 7 million short tons per year of coal export capacity within the next two years.

On a historical note, seaborne trade in thermal coal has increased on average by about 7% each year. Seaborne coking coal trade has increased on average by only 1.6% per year. The Energy Information Administration has said that U.S. coal producers exported 55 million tons of coking coal in 2010 versus 24.5 million tons of thermal coal. These statistics seem a bit at odds. Still from the figures I have heard, both China and India plan to grow their coal imports by approximately 10% per year. With Indonesia perhaps cutting back on exports in the near future, a good portion of these new imports by China and India may come from the U.S. The U.S. companies may be entering a super cycle of growth for coal. It may be smart to play this cycle. Coal prices, as energy prices in general, seem likely to go up. The companies that are ahead of the curve are likely to do well.

I should note that China has plans to urbanize 300,000,000 additional people by 2025 (the equivalent of the U.S. population). All of these people will need electricity, etc. A good part of this will come from coal.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.