For those companies supplying China and India with the raw materials needed to drive their resilient engines of growth, business has never been better. There is a distinction between recoveries, though. Fools need look no further than the king of coal, Peabody Energy (NYSE: BTU ) , for the latest confirmation that decoupling still reigns as the key construct of a new global economic reality.
An investment thesis in the making
Last December, I encouraged Fools to watch for resurgent Chinese coal demand to drive positive results for exporters like Peabody in 2009. By the end of the first quarter, that decoupling trend was already becoming clear. Results from Asian steelmaker POSCO (NYSE: PKX ) , clues from Cliffs Natural Resources (NYSE: CLF ) , and spot-on analysis from equipment-maker Joy Global (Nasdaq: JOYG ) helped to compile additional evidence.
The discussion from Peabody Energy's management that accompanied second-quarter results led me to propose the emergent reality of decoupling, despite widespread assumptions that the theory had been debunked. Now, with third-quarter results released this week by Peabody Energy, I'm just about ready to close the case against decoupling.
One slow recovery?
Peabody's net earnings plummeted more than 70% from the record heights achieved a year ago. Although lower benchmark prices for metallurgical coal played a role in those lower numbers, the substantially reduced demand from U.S. and European consumers of coal remains the primary drag on Peabody's operating results. Scrutinizing the 18% year-over-year decline in coal volumes shipped by rail operator CSX (NYSE: CSX ) during the third quarter, we find data that makes me seriously question expectations of a swift and sustainable U.S. recovery. As Peabody points out, coal inventories among its U.S. customers stand at 190 million tons ... equal to a full year of domestic production from the king of coal itself.
Offering a sober departure from the declarations of recovery that overwhelm the airwaves of late, Peabody reports a 10% decline in domestic coal-fired electricity generation year to date, adding: "U.S. coal markets continue to await an economic and industrial recovery in electricity generation." For Foolish context, consider that archrival Arch Coal (NYSE: ACI ) as late as February projected a decline of just 1% this year.
Of course, I would be foolhardy to look exclusively to the coal sector for hints about the outlook for steady domestic recovery. Unfortunately, this Fool continues to find corroborating indications from the housing sector, steelmakers, the automotive industry, equipment manufacturers, and railroads. When I look to precious metals, I find gold prices conveying the tenuous condition of the dollar, and this in turn involves China most directly -- shaping a critical currency component of this decoupling trend.
In drawing these important parallels and interconnections, I'm backtracking. Let's jump back into our discussion of Peabody Energy -- and leap halfway around the world.
Recovery built on BRICs and mortar
One story from Down Under strikes a dramatic contrast, revealing what's behind Peabody's record $429 million in cash flow from operations for the quarter. Peabody's Australian coal sales volume rose 30% from the second quarter, while realized prices increased 33%. Exports of metallurgical coal tripled the pace set during the first half of the year. From these robust levels, Peabody intends to double Australian production over the next five years to meet growing demand from China and India.
Although strategic stockpiling of commodities has certainly driven a portion of Chinese import demand this year, the fact that China in 2009 has imported 10 times the volume of metallurgical coal and five times the volume of thermal coal over comparable 2008 levels (through August) is like a neon sign over Times Square heralding the undeniable arrival of decoupling.
Some investors anticipated resurgent Chinese demand for commodities from the moment details of China's $586 billion stimulus package were announced last November. Further scrutiny revealed that the ramifications of China's stimulus plan would indeed surprise the skeptics, and subsequent moves to stockpile, purchase, and otherwise gain access to strategic resources revealed a nation resolutely focused on sustained industrial growth. Recent efforts by China's CNOOC (NYSE: CEO ) to acquire oil leaseholds in the Gulf of Mexico provide one example.
Fools interested in investing in China are encouraged to test- drive the Motley Fool Global Gains newsletter service with a 30-day free trial. The Global Gains team keeps a close eye on China for opportunities arising from decoupling.