A Chinese Coal IPO Might Mean There's a Light at the End of the Mine Shaft

Shaanxi Coal Industry, the third largest Chinese coal company, is getting set to go public—is this a good sign for the coal industry or just a fluke?

Jan 13, 2014 at 10:32AM

The global coal industry has been suffering, with giant international player Peabody Energy (NYSE:BTU) experiencing a price drop of over 25% last year. U.S. listed Chinese coal miner Yanzhou Coal Mining (NYSE:YZC) fell an even more painful 55%. Why, then, is Shaanxi Coal Industry looking to list shares, and what does it mean for the coal industry?

No love
There was very little love for coal in 2013, and 2014 isn't exactly starting off with a bang. That's not surprising, however, since flipping the calendar one day doesn't change the long-term industry trends that have been holding coal prices back. Namely oversupply, low prices, and a slowdown of the Chinese economy. China is the world's largest consumer of coal.

Those trends led Peabody Energy's Australian unit, which largely serves the Asian market, to realize prices of around $78 a ton in the third quarter, down over 20% from the year earlier figure of about $102 a ton. In fact, Peabody's U.S. operations actually experienced more stable pricing despite the long-term shift toward natural gas that's occurring domestically.

Other North American coal miners with export operations saw notable weakness, too. For example, Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI), and Teck Resources (NYSE:TCK) are big exporters of metallurgical coal, which is used in steel making. Low prices have restrained results. Teck CEO Don Lindsay went so far as to describe met coal pricing as "...below what we believe is required to sustain adequate production in the industry in the long term." The company's earnings fell almost 40% year-over-year in the third quarter.

And that comment, and earnings drop, came at a time when Teck is producing record amounts of coal for export to Asia. Alpha and Arch haven't been nearly as lucky. Alpha, for example, shut down one million tons of annual met production in the first half of 2013 because it was "uneconomic." Arch, meanwhile, noted mine closures that trimmed its met capacity by two million tons.

It's not like Yanzhou Coal, or soon-to-IPO Shaanxi Coal Industry, did any better. Although Yanzhou was able to increase production by around 7% in the first half of 2013, weak coal prices led to an over 10% revenue drop. And according to Shaanxi Coal's prospectus, the company's profits fell over 40% in the first nine months of 2013 versus the year earlier period.

Getting smaller
That helps explain why Shaanxi cut its IPO plans in half, or close to it, looking to raise just $1.6 billion. That, however, is an artifact of the Chinese crackdown on fraudulent initial public offerings that left Shaanxi, and ten others, in IPO limbo for a year regardless of its legitimacy.

So, in the end, this IPO isn't a sign that the coal market is getting healthier. (However, it is a sign that China may be getting a better handle on its financial markets—a growing pain that every nation must suffer through as it develops.) That said, there could be some good news here.

For example, Shaanxi notes that despite near-term headwinds, long-term growth in China will lead to robust energy demand. That, in turn, means increased demand for coal. And it's using a portion of the funds it raises to invest in its coal business, including buying more reserves. The Chinese government's efforts to close dirty, dangerous, and small mines will help large producers like Shaanxi and Yanzhou increase their market share.

Not a good sign, but not a bad one
It will be interesting to see how well received Shaanxi's IPO is. However, the company's constructive outlook is probably the most positive aspect of this news. Yanzhou will be a direct beneficiary of the same trends. Peabody and Teck will also see results improve, though to a lesser extent, if China's coal market stabilizes. So watch the IPO, but don't read too much into it—the important news is already out.

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