U.S. Coal Recovery

Brian Hicks

Written By Brian Hicks

Posted April 22, 2013

Perk up, coal enthusiasts. Your commodity may be making a comeback.

Coal producer Peabody Energy Corp. (NYSE:BTU) reported better than expected earnings in the first quarter, with shares going up 7.7 percent to above $20 on Thursday. The company believes next quarter will reveal anywhere from a 25 cent loss to a gain of 1 cent.

Peabody was able to pull through by cutting costs at its Australia plant, a strategic location where coal can be coal handsshipped to Asia with ease. The Australian branch accounted for 43 percent of company revenue last year, and the company was able to drive down costs by 9.5 percent, Bloomberg reports.

Peabody sales will grow to between 230 million tons and 250 million tons in 2013, the company expects. U.S. producing costs are also expected to dip by three percent in 2013.

The company also expects higher demand in the United States because of rising natural gas prices. According to Bloomberg, American demand for coal will rise by 7.3 percent in 2013 to 885.2 million short tons.

Peabody expanded Australian operations by purchasing Macarthur Coal for $5 billion in 2011. Nations like China and India need metallurgical coal, used to make steel, for supporting sprawling infrastructure, and thermal coal for producing energy.]

The company was hoping to make up for the U.S. drawback in coal demand, but with now-rising demand and closer access to Asian markets, Peabody is in a good position to make steady profits on both fronts.

U.S. Coal

Coal has gone through its fair share of punches as of late due to tougher regulations, environmental consciousness, and increased natural gas production.

Coal once made up half of America’s energy needs, but since 2005 that has declined to 37 percent, where it stands now. Coal needs in the U.S. are expected to be further reduced to just 20 percent by the time 2030 rolls around.

Coal is not faring that well on a state level, with Los Angles’ mayor Antonio Villaraigosa’s efforts to rid his city of coal reliance by the next decade. Scrutiny is also surrounding coal power plants because of their impact on the environment and local communities.

Coal emissions come in the form of mercury, sulfur dioxide, and nitrogen oxide, not to mention the high amounts of benzene that many coal power plants emit.

And besides politics, coal has been failing to compete on a business level.

A combination of fracking and horizontal drilling led many companies to discover more natural gas in shale deposits across the country. Many oil companies are looking to export U.S. natural gas to avoid cheaper prices on a domestic level, but natural gas prices are already beginning to tick up.

And though the government has made efforts to reduce domestic coal demand by closing down sub-standard plants and implementing stringent regulations, the United States is still the fourth-largest exporter of coal, trailing Russia, Indonesia, and Australia, as reported by Kitsap Sun. The U.S. has engaged in an out-of-sight-out-of-mind mentality when dealing with coal.

Environmental advocates are concerned that pollution is merely being shuffled around as opposed to being reduced.

Europe is currently the largest consumer of U.S. coal. And despite Germany’s favorable stance toward renewable energy sources like solar power, German imports of coal have increased as a response to Japan’s Fukushima accident.

Energy security has become an issue in Europe, and many nations hope to get away from dependence on natural gas from Russia.

However, the coal industry is expecting tighter European restrictions in the coming years, which is why many coal companies are turning to Asia, the second largest regional consumer. Coal insiders are lobbying for new terminals on the West Coast as a direct way of reaching Asian countries.

Many companies may be turning to Asia, but Peabody already has a head-start on its competitors by choosing to invest heavily in Asian markets through Australia.

Coal Company Exports

American coal plants have been hit hard domestically, but this has not stopped them from exporting coal abroad.

The news of Peabody’s narrower-than-expected loss sent coal companies up across the board. Arch Coal Inc. (NYSE:ACI) leapt 8.4 percent by close on Thursday, Alpha Natural Resources (NYSE:ANR) jumped 7.3 percent, and James River Coal (NASDAQ:JRCC) grew 6.1 percent.

Investors believe that Arch will benefit in the same way as Peabody, since both companies have mining operations in the Powder River Basin of Wyoming. Peabody and Arch Coal are at the helm of the coal export boom, along with Alpha Natural Resources. All three companies have coal terminals on the East Coast.

With East Coast operations exporting to Europe, and the potential for more coal terminals on the West Coast for direct access to Asia, the coal industry is well suited to become a contender in the energy market once again.

Coal use may be declining domestically, but with so many markets abroad, it is not going anywhere.

And coal even has the potential to be rebranded because of research and development.

Scientists are making headway into making coal a cleaner source of energy, with some researchers able to heat coal instead of burning it, removing 99 percent of pollutant emissions. Cleaner burning coal will be more expensive for manufacturers, but it will be interesting to see where this new R&D will go in the future.

If there is more investment and research into making coal a cleaner burning energy source, then there is no telling where this cheap and abundant resource will be in the next century 


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