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Being in the right place at the right time is a key to successful investing, but correctly identifying the next red-hot sector is only half the battle. The greater challenge is common both to investors and the companies they assess: making all the right moves to convert a successful forecast into outsized gains.
Peabody Energy (NYSE: BTU ) has risen to both challenges in convincing fashion and offered investors a powerful vehicle to capitalize on coal market strength in the process. Peabody consistently provides one of the clearest industry assessments of the intriguing "global supercycle" facing coal markets for the foreseeable future, and the company continues to position itself expertly to capitalize on the primary sources of coal demand.
Peabody grew consolidated sales volume by 5% to 61.2 million tons for the first quarter of 2011, and record product pricing for the Australian unit kicked in the winning goal with a 43% surge in per-ton revenue. The company scored a 29% boost to adjusted net earnings to reach $0.67 per share (from $0.50 per share in the prior-year period).
Coal consumption by India and China continues to grow at greater than a 10% clip, and Peabody draws attention to some 400 gigawatts of coal-fired electricity generation capacity presently under construction worldwide. These new plants alone will require 1.4 billion tons of additional thermal coal supply each year, and this Fool concurs with Peabody's conclusion that global supply will remain constrained over the very long term ... even after accounting for aggressive expansion plans by major producers.
Supplies for metallurgical coal are tighter still, which accounts for the record pricing of $330 per ton for high-quality Australian coking coal reported by Peabody as its quarterly settlement price. Peabody estimates that global steel production increased 10% during the quarter, thus far outpacing prior industry outlooks that called for 5% growth in output for 2011.
With the makings of a global supercycle clearly in play, the investor's focus then turns to each company's efforts to capitalize on the trend. Peabody continues to ramp up Australian production capacity to as much as 40 million tons over the next few years. That would represent nearly a 50% surge from the 27 million tons produced in 2010. Fortuitously, the key export hub at Newcastle, New South Wales, will increase its annual capacity by 28% to 145 million tons to accommodate expanding production by Peabody, BHP Billiton (NYSE: BHP ) , Yanzhou Coal Mining (NYSE: YZC ) , and other key operators in the region. Dry bulk operator Diana Shipping (NYSE: DSX ) , which awaits delivery in 2012 of two enormous vessels built specifically for that coal port, will no doubt delight in the news.
Meanwhile, Peabody remains on the short list of possible winners in a bid to develop Mongolia's massive coal project called Tavan Tolgoi. The miner faces stiff competition for the bid from ArcelorMittal (NYSE: MT ) , Vale (NYSE: VALE ) , and Xstrata, but indications are that a decision will be handed down shortly. Ivanhoe Mines (NYSE: IVN ) already has a foothold in the region with the producing Ovoot Tolgoi mine, which brings Rio Tinto (NYSE: RIO ) to the party through its 34.9% stake in Ivanhoe.
If you are intrigued as I am by Peabody's characterization of a global supercycle for coal, based upon market fundamentals that will "remain strong for decades," then I encourage you to add Peabody Energy to your watchlist by clicking on the link below.