Coal has been beaten up in the media and the markets over the past year or so. Being outspoken against coal has been made easy by cheaper, cleaner-burning natural gas, which has been produced in abundance here in the United States recently.
To tackle reductions in both demand and price, coal companies in the U.S. were forced to curtail production and capital spending in preparation for future production. Entering 2013, could the coal market finally have found a trough? To help answer that question, I turned to the conference calls of some of the biggest players in the business to see what their CEO's had to say.
The largest player in the business, Peabody Energy (NYSE: BTU ) , has found itself operating in both the western U.S. and Australia, which has allowed it great access to the import markets of China and India. Record exports helped carry Peabody and its peers through 2012's dormant domestic market, but does Chairmen and CEO Greg Boyce see this continuing?
We would expect a growing reliance on imports to help satisfy India's continued build-out to meet its energy needs. Japan and Europe also increased thermal coal imports in 2012, as coal continued to substitute for declining nuclear generation, and as international gas prices remain high. We expect to see burn thermal coal demand to grow in 2013 in excess of 40 million tons. We look for approximately 75-gigawatts of new coal-fueled generation to come online globally in 2013, which will require another 250 million tons annually at full capacity.
With positive sentiment remaining abroad for coal, what does he expect here in the U.S.? Will there be a shift or simply continuation of the status quo?
In 2013, we expect an improved supply/demand balance as stockpiles normalize, led by a 40 million to 60 million ton increase in US coal use. We expect US met and thermal coal exports to fall from 2012, due to current pricing in the seaborne market. Based on producer announcements and early trends we are seeing so far this year, we would expect US production to continue to decline in 2013.
In 2012, Alpha Natural Resources (NYSE: ANR ) doubled its exports of eastern thermal coal as volumes reached 6 million tons shipped. This is an area that Chairman and CEO Kevin Crutchfield says the company feels confident about the its ability to expand. Further encouraging news, he says, will emerge from the realignment of the supply and demand dynamic.
Since bottoming with spot prices reported in the low $140's per metric ton late in the third quarter, the Asian market has strengthened as a result of reacceleration of Chinese manufacturing activity, steel restocking efforts, and record high Chinese coking coal imports in December ... And the current pricing is insufficient to sustain the large portion of the remaining global production base, these raise the odds that better times lie ahead. And those odds increase further if growing Asian economies start to consume a larger portion of a smaller natural supply base.
Investors simply cannot avoid monitoring the natural gas market when considering coal as a bullish investment. Arch Coal (NYSE: ACI ) President and CEO John Eaves touched on this after discussing his 2012 performance. In his mind, the downward pressure low natural gas prices have been placing on coal could finally shed some weight.
[We] believe that natural gas prices are unsustainably low today, as companies cannot make sufficient returns to justify continued investment, as evidenced by the rig count decline. Over time we expect market forces to move gas prices higher, which should further bolster coal's competitiveness in the power sector. We also believe that US generators entered 2013 with conservative burn forecasts, and could potentially find themselves needing coal as the year progresses. This development should initially help to reduce the stockpile overhang, but could eventually lead to more active and dynamic market in the second half of the year and into 2014.
After reading these three outlooks, CONSOL Energy (NYSE: CNX ) reels everyone's expectations a bit with Chairman and CEO J. Brett Harvey's skeptically confident forecast:
And remember, it's demand for energy. It's not the ability to serve the customer. The demand is just not there, and we think China's turning a little bit, and that looks pretty strong. As Jim talked about, our inventories there have dropped right inside of China, and we're optimistic. But it's a little bit dicey, yet. I wouldn't give a robust look, but I can tell you we're cautiously optimistic.
A fifth company, though much smaller than those mentioned here -- market capitalization of just $95 million -- is James River Coal (NASDAQ: JRCC ) . Due to its limited scope it is potentially a riskier play on the rebound, but it releases earnings on March 7 for those interested on getting a smaller player's perspective.
Investing in cyclical industries like coal requires attention to the details that might signal the bottom of a downward cycle. These peaks and troughs are inherent, and that is something that investors must come to grips with. You can only hope that successive troughs are higher than those that came before it.
For those of use who have a penchant for long-term investing, getting in at, or as near as possible to, the bottom of these troughs is ideal. Based on these CEOs' appraisals of what the landscape looks like toward the horizon, we could have finally reached that point of inflection. Like Benjamin Franklin once said: "Kites rise highest against the wind."
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