If you take a bald eagle and a panda, take away their meals, and inject them full of steroids, what happens? Thankfully, we have regulations in place to ensure that we never find out.
As the U.S. develops a stimulus plan to outstrip China's in scale, it appears that just such an experiment is now under way. With traditional sources of nourishment for these economies torn away by the specter of global recession, the two nations will resort to stimulus steroids, with spending of perhaps $1.4 trillion or more combined. Nobody knows how the experiment will play out, but I have a notion it could be bullish for coal in 2009.
Together, China and the U.S. account for more than half of all global coal consumption, so when I think about $1.4 trillion worth of domestic spending in those countries with a focus on building infrastructure, it's hard not to imagine the engines of coal demand being stoked. Although some analysts are calling for weakening coal demand through 2009, I believe they may have it wrong.
Production cuts abound
It's been quite a December for coal already. Within the metallurgical coal sector, Cliffs Natural Resources (NYSE: CLF ) cited market uncertainties as it included a West Virginia coal mine along with production cuts at its North American iron ore mines. Xstrata and Australia's MacArthur Coal have both slashed met coal production in Australia, amid an abrupt demand drop from Asian steelmakers. On the thermal coal side, Chinese coal companies are reportedly dropping 15% of production as price weakness continues.
The U.S. coal industry outlook is somewhat muddied by an array of conflicting indicators from the political, economic, and legal arenas. Arch Coal (NYSE: ACI ) is looking ahead toward acquiring assets even while predicting a decline in U.S. production next year. The outgoing administration recently passed rules that make it easier for coal companies to dump waste from mountaintop mining activities, while Massey Energy (NYSE: MEE ) faced legal battles this year regarding permits for such strip mines.
Under an Obama administration, I expect a more restrictive regulatory regime with respect to surface-mining activities in Appalachia, and so continue to favor CONSOL Energy (NYSE: CNX ) among the purely domestic players. CONSOL obtains the lion's share of its coal from underground mines. While President-elect Obama's stated objective to curtail the production of electricity from coal could eventually dent domestic demand for thermal coal, I think it's safe to say the transition will not be a swift one under these economic circumstances.
Asia holds the key
Meanwhile, bullish signals are beginning to emerge from Asian industrial titans such as POSCO (NYSE: PKX ) and China's Baosteel, suggesting expectations for renewed industrial demand in Asia. China recently announced plans to spend more than $21 billion on rail infrastructure within the coal-rich Shanxi Province, and leading coal producer Peabody Energy (NYSE: BTU ) continues to pursue projects in China following the October announcement of a massive project in Inner Mongolia. Global steelmaker ArcelorMittal (NYSE: MT ) signals that inventories are running low and that its recent production cuts may soon be reversed.
With China's stimulus-related activities already under way as we approach the new year, I expect coal demand to heat up there well before we see a boost in the United States. However, since China has aggressively grown coal-production capacity in recent years, it is difficult to gauge the extent to which China might be required to tap foreign sources of coal in the near future. Hopefully, a clearer picture will emerge as we move closer to the start of 2009 benchmark contract prices in April. Just as with the recently announced metals purchases, I expect China to support domestic miners before returning to the world market in earnest.
Let's assume for now that the World Bank is on the money with its forecast of 7.5% GDP growth for China in 2009. If such a level holds, then I believe China's position of relative strength will hasten its economic recovery on the back of the $586 billion stimulus plan. As for a potential $850 billion stimulus package in the U.S., I suspect the scale would be adequate to spur impressive commodity demand in the nearer term but utterly insufficient to spark true economic recovery in the face of such daunting challenges.
Among the world's major coal producers, I see none better positioned than Peabody Energy to benefit from demand recovery in China, and then at least stabilized demand for U.S. coal. With massive projects in the works inside China, robust resources in nearby Australia, and some high-volume operations in the U.S. to boot, Peabody has the stuff to remain the king of coal through whatever the future may have in store.