Curtailing a Coal Giant

U.S. thermal coal miners are increasingly looking to foreign markets for growth. Indonesia dominates the global thermal export market, most notably in Asia. That country's government, however, is talking about changes that could lead to a reduction in coal exports. That would be a positive for miners like Peabody Energy (NYSE: BTU  ) , Cloud Peak (NYSE: CLD  ) , and Arch Coal (NYSE: ACI  ) .

Big and leaky
Indonesia is considering hitting its coal miners with increased coal royalty payments and an export tax. That would increase the costs that miners in the country face and could have potentially negative impacts, say local coal organizations that oppose the idea. The potential impacts include coal miners losing money and shutting down, and an increase in illegal coal exports.

The government appears to be aware of the later issue, and is also considering such steps as limiting coal exports to select ports. That would allow Indonesia to better control what natural resources are leaving its shores. In fact, Arch recently highlighted the country as shifting toward increased use of coal to support its internal electric needs. That, coupled with the above news, suggests a very different view of coal within the Indonesian government, potentially changing it from a mere commodity to a vital national resource.

The Aussie connection
If the Indonesian government can reign in illegal shipments and imposes increased tariffs, global coal volumes will start to balance with demand that much quicker. And, longer term, if the country starts to consume more of its own coal resources, there would be a healthier global coal market for all participants.

Peabody would see an almost immediate benefit. Around 15% of the company's sales come from its Australian thermal coal business. That puts the company in direct competition with Indonesian coal for access to key markets in China and India, let alone the rest of Asia. However, Peabody is also expecting to increase its exports of ultra cheap Powder River Basin (PRB) coal from the United States.

Back in the states
That's the same plan that PRB player Cloud Peak has. Exports should account for around 5% or so of Cloud Peak's coal volumes this year, up from virtually nothing five years ago. That said, the company has limited export options so it has to wait for additional U.S. port capacity before it can materially increase its global presence.

The company, however, makes a good case for why its coal should be able to compete with Indonesian coal despite the longer shipping distance: energy content. Northern PRB coal is already at the high end of the quality spectrum compared to Indonesian coal, with Southern PRB coal toward the low end. However, Indonesian coal quality appears to be falling, which makes both Northern and Southern PRB coal more desirable. Peabody notes the relatively low quality of Indonesian coal in support of its Australian thermal, as well.

Arch is another U.S. coal miner looking to be a bigger player in the foreign market. The company is expecting to more than double its coal exports by 2020. Thermal coal will be a big part of that story. And, unlike Cloud Peak, Arch has mining operations in the PRB and the Illinois coal basin (ILB), which is the second cheapest U.S. coal region. It also has access to ports across the country, giving it more opportunity to get its thermal coal onto the water now.

A future exporter?
Rhino Resources (NYSE: RNO  ) is another coal company to watch, since it has a new project set to come online in the middle of next year in the ILB. Thermal exports aren't currently lined up for the mine, which has a domestic customer contract backing its initial production targets. However, it is located near a river with easy access to export terminals.

That could make thermal exports an increasingly important part of Rhino's business. And the fact that the mine won't open until next year will allow more time for the domestic and global coal markets to balance out supply and demand. That includes potential upside from rule changes in Indonesia.

Curtailing the giant
The changing view of coal in Indonesia is a good thing for the global coal industry. If you are interested in coal, particularly on the thermal side, you should keep this country and its potential tax and tariff changes on your news watch list. The outcome could have a material positive impact on some of the world's most important coal miners—and some lesser-known players, too.

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