Relatively weak demand for thermal coal in China has pushed coal prices lower in Australia. That's a problem for big miners like Rio Tinto (NYSE: RIO ) , BHP Billiton (NYSE: BHP ) , and Peabody Energy (NYSE: BTU ) . However it could add to the allure of uranium miner Cameco (NYSE: CCJ ) .
Big imports, big influence
China is the big dog when it comes to coal, accounting for more than half of the world's consumption. It's also facing increasing environmental problems. Since coal is an easy scapegoat, there's a move to limit the use of the fuel.
That's a problem for a market that's already oversupplied. However, China is still expanding its energy infrastructure, so coal will likely see demand growth as the total energy pie grows. Coal demand may not grow as fast, but China is too big to power without coal playing a prominent role. Of course that doesn't help right now, with Rio Tinto CEO Sam Walsh recently describing the coal sector as problematic.
Rio and fellow diversified miner BHP have notable coal operations in Australia. The target market for that coal is China. Demand growth in India, which is also building out its energy infrastructure, may help to offset a slowdown in demand from China. However, India doesn't hold as much sway, so Rio and BHP will have to continue focusing on cost containment, a trend occurring throughout the beleaguered coal industry.
Peabody Energy is also a big coal miner in Australia, with the country accounting for about half of its business. So it, too, will likely feel a pinch from lower prices led by softening demand. That said, Peabody's U.S. operations are split between the Powder River Basin (PRB) and the Illinois Basin (ILB). PRB coal has seen a dramatic spot price increase because of low customer inventories. And the ILB saw production increase 5% last year, despite generally weak coal markets.
So Peabody's U.S. coal operations could actually provide an offset if it's Australia business starts to weaken. That would be a reversal of the trend from last year. But it would, once again, show the strength of Peabody's globally diversified business model.
Here's who benefits
However, China doesn't have too many options if it's looking to shift its fuel sources. While renewable power is a wonderful idea, it isn't controllable. That means it has to be paired with base-load power sources that can make up for any shortfalls if there's not enough rain, sun, or wind. Nuclear, which has a bad reputation but is relatively clean, is likely to be a go-to power source.
According to uranium focused Cameco, there were 19 nuclear power plants operating in China in 2013. It had 29 under construction, with another 30 expected by 2023. That's going to drive increased demand for uranium. If China is truly rethinking its fuel plans, look for a few more nuclear plants to get built and even more long-term demand for uranium.
Interestingly, the market dynamics in coal and uranium are vastly different. Historically uranium has been driven by supply. That's the exact situation that coal finds itself in today. But, unlike coal, where supply continues to be robust, uranium appears to be on the cusp of switching gears—demand will likely be the driving force in the years ahead.
This is because mined uranium has lagged demand for years, with the excess made up from outside sources like the conversion of Russian nuclear warheads into fuel grade uranium. That program ended in 2013. Uranium mining will have to make up the difference. Rio Tinto has a small investment in uranium mining, too, so it should benefit from this trend—but not nearly enough to offset weakness in its larger coal business.
Watch, but don't worry
Coal supply and demand will balance out over time, but China will continue to need lots of it. Keep an eye on the day-to-day shifts, but focus on the long-term trend. That said, uranium looks well positioned today and could actually benefit from even marginal adjustments to China's utility construction plans.
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