Can Coal Exports Compensate For Domestic Coal's Plunge?

Includes: ANRZQ, BTUUQ
by: Trefis

Many coal companies, such as Alpha Natural Resources (ANR) and Peabody Energy (BTU), are mulling over the fate of coal as consumption has continued to decline in the U.S. Natural gas has undoubtedly given coal companies a run for their money since prices began to slide last year. Moreover, the Environment Protection Agency’s (EPA) recent regulation to cut emissions will reduce coal-fired power generation in future, which is hurting demand, and it is estimated that nearly 40-60 GW of coal-fired generators will retire by 2020.

In view of all this, Alpha needs to lay out a strategy to streamline its operations to cater to foreign markets. India and China have demonstrated an enormous appetite for coal, riding on a high level of industrialization and urbanization. However, the two most important questions to be answered are: Is the export market large enough to make up for the dip in domestic coal demand, and how long will it take for companies in the U.S. to be able to take advantage of the export markets?

Unlike Western economies, Southeast Asian economies such as India and China still heavily rely on coal for meeting their power requirements. Further, these nations are developing at a rapid pace, resulting in significant infrastructure developments. This has led to increased use of coking coal in these countries, which is used for manufacturing steel, a basic building material. The demand for coal, as a result, is significantly high in this region both in thermal and metallurgical coal.

China is one of the largest importer of coal as Chinese utility companies have heavily relied on imported coal because it’s cheaper. The coal from South Africa, Australia and the U.S. is considerably cheaper than the domestic ones. According to the latest reported data, China imported a total of 140 million tons of coal in first half of 2012, implying a 66% year-over-year growth. This incredible growth is largely due to a phenomenal increase in the met coal demand. Met coal imports increased by a whopping 175%, making 43.6 million tons of the 140 million tons of total import. Asia’s total thermal coal demand is estimated to be at 550 million tons.

Another large coal importer in India will import more than 80 million tons of thermal coal in FY 2012-13. These two nations -- India and China -- together have a import requirement of close to 300 million ton a year of thermal coal and 70 million ton a year of met coal. These are significant export opportunities for Alpha.

However, there are some risks to these market. Australia and South Africa are geographically closer to India and China, which gives them an edge with shipping costs. Also, the coal inventories at Chinese coal suppliers have been piling up. They are likely to soften prices to clear up their stocks, which may slow import activities in China.

The export facilities in the U.S. are presently inadequate to facilitate high volumes of coal export. However, the shipping companies are streamlining their businesses to cater to coal export. The terminals are being constructed on the Gulf and East Coast.

We expect over a period of the next two to three years the facilities will be ready. So, it can take some time before coal companies in the U.S. can take advantage of the booming Asian coal market. Alpha shipped a total of 107 million tons of coal in 2011, of which 16.3 million ton was exported. Of the exported coal, the majority was met coal, which sells at a higher price. We believe the company can make up for the loss of domestic thermal coal volumes by met coal exports in the near term, which could help the company to fend off the decline in revenues caused by domestic coal slump.

Disclosure: No positions.