The World's Largest Coal Exporter is Changing its Tune

Indonesia is cutting coal exports by 5% in 2014, that's another good sign for thermal coal.

Feb 14, 2014 at 11:36AM

The Indonesian government is looking to cut coal output by 5% this year from the 421 million tons mined in 2013. That's good news for the broader coal market, since it will help reduce the oversupply situation keeping prices low. Look for Peabody Energy (NYSE:BTU) to be a direct beneficiary, but don't forget Cloud Peak Energy (NYSE:CLD) and Alpha Natural Resources (NYSE:ANR).

The biggest to the biggest
Indonesia is the largest exporter of coal to China, the world's largest consumer of the fuel. That's been a fruitful partnership for both. China, however, is increasingly concerned about the environmental impact of coal. For example, it has been shutting thousands of small, dangerous, and inefficient Chinese coal mines.

It also hit lower grade coal imports with a 3% tariff. Indonesia is the source of over 90% of the coal being affected by the tax. So there's more going on here than meets the eye. However, Indonesia is making moves that suggest it's also starting to rethink it natural resource policy. For example, it is now requiring some raw materials, like nickle, to be processed before they can be exported.

Edi Prasodjo, Coal Business Director at Indonesia's Energy and Mineral Resources Ministry, notes that coal is a consumable commodity. If the country sells all of its coal, there won't be any left to help keep the economy growing. And the country appears ready to charge higher coal mining royalties, too.

Giving this miner a boost
Even if the country's miners find a way around the limit, as some industry watchers expect, Indonesia is at least attempting to do the right things about protecting its natural resource gifts. If it is successful at slowing coal exports, or better yet trimming them as planned, that will be a huge benefit to the international trade of thermal coal.

Peabody Energy, which operates out of the United States and Australia, should be an almost instant beneficiary. The company recently signed a deal with China's Shenhua Group to provide thermal coal to China. The 50/50 joint venture pairs one of the world's largest coal importers with one of the world's largest coal miners. If supply from Indonesia slows, Peabody will be there to help make up the difference. And if prices firm, Peabody will make more money for every ton it sells.

In the shadows
But the benefit of higher coal prices would extend much further. For example, Cloud Peak Energy is waiting on the the Gateway Pacific Terminal to be built so it can start exporting more of its Powder River Basin (PRB) coal. The port is expected to be built in 2018, so that's a few years off.

But it isn't sitting around waiting. It's been using its strength in the South Korean market to expand into new countries, most notably sending test coal to Japan. If all goes according to plan, in a few years Cloud Peak will be ready to fill any gaps left by Indonesia's efforts to reduce coal output. Price increases would be heartily welcomed, too.

Then there's Alpha Natural Resources, which recently opened an office in London. The company exports thermal and metallurgical coal from its U.S. operations around the world. And it has more access to ports than Cloud Peak.

According to the company, its, "objectives in the European market include increasing customer regard for the quality, reliability and dependability of the company's thermal coals and unsurpassed U.S. export capabilities." Europe gets a lot of its coal from Africa, but if prices head higher, U.S. thermal coal could start to play a more prominent role. In fact, the struggling miner recently inked a deal to sell four million tons of Central Appalachian thermal coal into Europe.

A global helping hand
Indonesia rethinking its natural resource riches will be good for many mining markets. The recent push on coal should be a direct benefit to Peabody, but it will also help U.S. miners looking to grow their export businesses, like Cloud Peak and Alpha. Keep an eye on these two, Indonesia's efforts could turn them into dark horse winners.  

Start 2014 off on a more sure foot than these coal miners
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