Highlights from a research note out of Barclays Capital indicate demand for Powder River Basin (PRB) coal is likely to surge.
"The Powder River Basin (PRB) coal market is expected to experience a surge in new orders. First, US power plants are forecast to switch to PRB coal in their efforts to comply with the recently issued Cross-Air Pollution Rule (CSAPR). Second, proposed new west coast coal export terminals and expansions of existing terminals promise to open trade routes to large consumers in Asia."
According to the research note, "If all four proposed export terminals are opened/expanded and CSAPR causes demand for PRB to grow by the amount forecasted by the Environmental Protection Agency (EPA), the incremental demand for PRB coal will surge by 136 million short tons, or about 27%." Simple economics will tell you that increasing demand leads to increasing prices, all else equal. In this instance new mining capacity and infrastructure will be a crucial variable determining just how far any price increases can go. The report goes on to say, "the lack of mining capacity and transportation infrastructure to support this level of demand suggests that PRB output will be measured. Further, it seems unlikely that prices for PRB coal would rise high enough so that PRB loses its advantage in the domestic and potential export market."
Coal remains a terrific avenue to gain exposure to global emerging markets.
As you can see from the chart above, India continues to increase coal imports year after year. China, despite being a tremendous coal miner, still remains a significant coal importer. It is notable that China imports have declined year over year. Barclays attributes this to "surging domestic rail transport costs that gave imported coal a cost advantage. Structural changes in the Chinese coal and power industries are expected to reduce the need for imported coal over time." As these issues with transportation costs have abated, imports have fallen. Barclays does argue that "aside from episodes of transportation bottlenecks that mandate the importation of coal, Chinese buyers will only tap the seaborne market if imported coal is priced competitively."
India is a bit of a different story from China. Barclays noted that they "expect the Indian domestic market to have a structural shortage of thermal coal as domestic production is unlikely to meet demand in the medium term." They go on to forecast that, "Indian imports could overtake Chinese imports in 2012, making India a potentially bigger market for PRB coal than China in the long run."
Some of the public companies that operate in the PRB region include:
While the general rising tide of growing energy/power demand will benefit the entire coal industry, these companies with operations in the Powder River Basin are best positioned to take advantage of the opportunities new export customers will create. They are definitely worth considering for any investor looking to gain exposure to emerging markets, global growth, hard assets, energy, etc.
Good luck and thanks for reading.
Disclosure: I am long ARLP.