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  • Can Peabody Energy's (BTU) Global Operations Offset Declining Domestic Demand? 0 comments
    Jan 24, 2014 11:15 AM | about stocks: BTU

    Fluctuation in the coal consumption of U.S. electricity generators greatly affects Peabody Energy's (NYSE: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 (NYSEARCA:PRB) coal miners such as Peabody and Cloud Peak Energy (NYSE: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 (OTCPK: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 (NYSE: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.

    MissionIR provides investor relations services to publicly traded companies in exchange for compensation. This article may be part of our efforts to widen a client's exposure. To read our full disclaimer, visit http://disclaimer.missionir.com

    Stocks: BTU
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