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U.S. Coal and the Demand of the Global Supercycle

http://www.fool.com/investing/general/2011/04/28/us-coal-and-the-demand-of-the-global-supercycle.aspx

Christopher Barker
April 28, 2011

American coal producers are scrambling to increase their production volumes. Although stockpiles at domestic utilities remain elevated above historic norms, forecasts for 2011 GDP have been revised downward, and cheap natural gas continues to offer an attractive substitute.

One might normally expect those sorts of factors to constrain bullish sentiment among domestic coal miners -- but quite to the contrary, they convey excitement about their outlooks for earnings growth and sustained strength for coal prices. Arch Coal (NYSE: ACI  ) this week discussed its vision for "a multi-year upswing in the coal market," while reporting ample net earnings of $59.4 million for the first quarter.

So where is the demand behind this strength in the coal market originating? We can see the phenomenon is not unique to any one region of the country, since Arch Coal revealed sequential sales-price increases for the first quarter across all three of the major coal basins in which the miner operates. Neither can we ascribe such strength to the encouraging upswing in U.S. industrial activity that bellwethers Nucor (NYSE: NUE  ) and Steel Dynamics (Nasdaq: STLD  ) revealed within their first-quarter results. As it happens, U.S. railroads to date have hauled only 2.9% more coal by volume in 2011 than they did for the anemic corresponding period of 2010.

The reason why we struggle to pinpoint the source of growing coal demand among the traditional domestic culprits is that the real source of demand growth is neither domestic nor traditional. Exports are now the key driver of strength in U.S. coal markets, which links the outlook for domestic miners to the very same "global supercycle" that international operator Peabody Energy (NYSE: BTU  ) has touted for some time.

While headlines have focused upon efforts by BHP Billiton (NYSE: BHP  ) and other Australian coal miners to grow export capacity in response to demand from China and India, U.S. coals are quietly expanding their reach. Peabody Energy has proposed construction of a new coal terminal in Washington State that could inject up to 48 million tons per year into the Pacific trade (of which Peabody envisions contributing 24 million tons from its mines in the Powder River Basin).

For Appalachian metallurgical coals, even the long voyage to Asia has proven economical for miners like CONSOL Energy (NYSE: CNX  ) , and Patriot Coal (NYSE: PCX</