Peabody Energy's Deal With China Spells Opportunity for U.S. Coal Miners

China is looking to use higher grades of coal; that's bad news for Indonesia, but a recent deal with Peabody Energy suggests it could be good for U.S. coal miners.

Jan 16, 2014 at 11:15AM

Coal is dirty, and China's pollution problems have made the abundant and cheap fuel an easy scapegoat. That's why the country is taking steps to clean up coal, including using new technologies like gasification and shuttering thousands of old mines with lower-quality coal. A recent deal with Peabody Energy (NYSE:BTU), however, could be tipping China's hand about both its direction and the future for U.S. coal.

Indonesia's problem
Indonesia is one of China's biggest coal suppliers. In fact, coal trade with China allowed the country to surpass Australia as the largest coal exporter back in 2011. That's been good news for China, which gets access to cheap coal. And Indonesia benefited since it's been able to grow along with China. However, there are problems brewing with this relationship.

China's shift toward a cleaner coal footprint is just the start of the story. U.S. miner Cloud Peak Energy (NYSE:CLD) has noted that the quality of Indonesian coal has been falling. Lower quality coals burn less cleanly, which is undesirable from China's environmental perspective. That helps explain the recently announced tax on the type of coal that comes from Indonesia.

In fact, the tax appears to be targeted directly at Indonesia, since the country is the source of over 90% of the imported coal that will be affected by the 3% levy. But, at the same time, China's Shenhua Group inked a deal with Peabody for the globally diversified coal giant to to provide China with thermal coal. That coal can come from Peabody's Australian operations, but it can also come from its ultra-cheap Powder River Basin (PRB) operations in the United States.

Big in the PRB
Asian demand is what PRB-focused Cloud Peak is pinning its export hopes on. The company is using its leading position in South Korea to help build its presence in the region, recently sending test coal to Japan. If China is shifting away from Indonesian coal, Cloud Peak's export prospects could materially improve.

The deal with Peabody and the "Indonesian Coal tax" suggests that there is a good possibility of China looking to other countries to meet its coal needs. Since Cloud Peak considers Indonesia's coal the PRB region's primary competitor, any loss of market share by Indonesia is a win for PRB coal—which is all that Cloud Peak mines.

Another big PRB miner is Arch Coal (NYSE:ACI). If China gets a taste for PRB coal from its Peabody deal, both Arch and Cloud Peak could quickly see increased demand. That would be more beneficial for Arch right now because it has more export capacity than Cloud Peak. Cloud Peak has to wait for new ports to be built before it can really ramp up its exports.

Arch, meanwhile, could use a little good news. The company's ill-timed expansion into metallurgical coal left it with a relatively heavy debt load and forced it to cut its dividend to preserve liquidity. While that's left the shares severely depressed, it also means there's more upside potential when coal markets recover. If China starts looking to PRB coal for its energy needs, Arch's upside could be material.

Watch China and U.S. exports
China is the world's largest consumer of coal. The moves it makes are important to watch. At the same time, the United States is a relatively small player in the thermal coal export market. If a renewed focus on the environmental impact of coal pushes China more and more toward higher quality coal, Indonesia is likely to be a big loser—but any market share loss will be made up by other players.

It seems that Peabody has put itself at the front of the line to benefit from Indonesia's woes. But Arch and Cloud Peak are also well positioned with cheap PRB coal on the West Coast. Keep an eye on both the U.S. export market and China's moves. China could be just what Peabody, Arch, and Cloud Peak need to turn the corner.  

Start your year off with the right investments
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers