Listen to some analysts and you'd get the impression coal companies should simply close their mines and call it a day. Demand for coal, particularly thermal coal, has peaked they say and with China ready to fold its own tents by clamping down on emissions, the case for coal has turned cold.
Thermal coal prices have plunged from their 2011 peak of $140 per ton to below $80 per ton. Australia, Russia, and the U.S. pumped out 13% more coal in the first six months of this year than they did in 2012, contributing to the weakness in prices. Even domestically produced coal in China has been subject to falling prices causing analysts at Citigroup, for example, to suggest coal for power generation in the country will peak before 2020.
That's certainly a gloomy outlook for producers like Peabody Energy (OTC:BTU), which is looking for the seaborne trade for thermal coal to grow this year after total coal imports to China grew 30% in the first quarter to 80 million tons. India is also a major coal-consuming nation and imports rose 25% in the quarter allowing the subcontinent to surpass Japan as the second-largest thermal coal importer.
Coal generates 40% of the world's electricity, up more than half in the past decade, according to the Energy Information Administration, with China responsible for 47% of its consumption, almost as much as the rest of the world combined. While Goldman Sachs says "the window for thermal coal investment is closing," others would beg to disagree.
The folks at Wood Mackenzie say in order for coal demand to fall, both natural gas and ultra high voltage electricity lines would have to become more prevalent, neither of which is likely to happen before 2030. Significant investments would need to occur in alternative energy sources and they're not happening now, meaning any forecast suggesting coal's preeminence in energy production will decline is way off the mark. It forecasts China's coal appetite to grow from 1.5 billion tonnes per year to 2.5 billion tones over the next 17 years.
Arch Coal (NYSE: ACI), the second largest coal producer, opened an office in China earlier this summer as it increasingly turns its attention to the seaborne trade, though it is also selling off non-core assets and has arranged to sell its thermal coal mines in Utah as a means of building up its metallurgical coal business.
Lower prices hurt CONSOL Energy (NYSE:CNX) as well, but being a low-cost provider in China helped the energy producer realize new sales opportunities while producing at higher levels than even it expected. Even Europe represented new outlets for its production.
Similarly, Alpha Natural Resources (NYSE: ANR) saw China be the bright spot in its earnings report, accounting for a 5% increase while Europe and North and South Americas were down by a like amount. And while it notes analysts are looking for a slowdown, it says the country's steel production will rise enough to cause an increase in coal demand.
In short, if you make your investment decisions in the industry based on analyst projections, you'll likely find them all over the place and change month to month if not minute to minute. I've previously noted my belief that although coal stocks are likely to experience more weakness in the near term, the long-term outlook is not nearly so bleak as some investment houses would have you believe and they'll report "shock" and "surprise" before long over the remarkable resiliency of the industry.
I think the biggest producers like Peabody that have the soundest financials are the ones investors should probably keep the closest eye on. The domestic assault on the industry is not over by any means and while the prospects for exporting their output remains brighter than what we've been led to believe, hurdles such as insufficient infrastructure to support exports remain a challenge, but they're not insurmountable.
Reports of the death of the coal industry's canary have been greatly exaggerated.