Coal is priced in U.S. dollars, so foreign exchange rates can have a big impact on supply and demand, as well the costs and profits, of foreign coal miners. For example, a falling Australian dollar has been boosting results at BHP Billiton (BHP +6.42%) and Peabody Energy (BTU +0.00%) so far this year. The flip side of the equation, however, is that these two industry giants are benefiting at the expense of U.S. coal miners.
The Aussie thing
Both BHP and Peabody have large Australian operations. In fact, that country accounts for almost half of Peabody's business. Both companies sell thermal and metallurgical coal from the natural resource rich country. This isn't a small issue, Peabody's management highlighted the benefit in its second quarter conference call: "for the first time in a number of years, we would note that the Australian dollar is also providing some relief to our cost position."
In the case of BHP, the company noted that a strengthening U.S. dollar in fiscal 2013 "benefited our cost base during the period and increased Underlying EBIT by US$480 million." Now both BHP and Peabody are global players, so what helps them in one area can actually hurt them in another. For example, the other half of Peabody's business is U.S. thermal coal, and BHP has notable oil and gas operations in the United States.
However, both of those businesses have large domestic customer bases, so the negative impact is muted. However, for U.S. coal miners that have been looking to get into international markets, the impact is notable. Foreign miners, particularly out of Australia, have been able to undercut on price because their costs have gone down relative to U.S. players.
Metallurgical coal
Although thermal coal is increasingly being exported from U.S. shores, the largest export market is for met coal. That makes exchange rate changes a big deal for met-heavy companies like Walter Energy (WLT +0.00%). Less than 10% of the company's coal volume stays in North America, the rest goes to Europe (41% of coal volume), Asia (32%), and South America (19%).
The company is lining production up with demand, which means that 2013 is expected to see coal production of about 11 million tons, down a touch from the 11.7 million tons mined in 2012. That said, Peabody increased its Australian met sales by about 14% year over year in the second quarter.
The "other" coal
Walter is focused almost exclusively on met coal, so the impact of exchange rates can be pretty obvious. Less obvious are companies like Natural Resource Partners (NRP 2.26%) and Rhino Resource Partners (RNO +0.00%), where met coal is part of their businesses, but not as large on a volume basis as thermal coal.
Rhino, for example, highlighted sales volume declines in its met focused businesses along with weak pricing as key detractors to its performance in the second quarter. And, notably, has only sporadically been able to sell met coal on the "spot" market. In its second quarter release, the company noted that "Coal revenues per ton decreased primarily because of lower prices for metallurgical coal sold in the second quarter of 2013 compared to the same period of 2012." Met coal has historically been a high-margin product that lifted Rhino's profitability, since around 90% of its coal sales volume comes from the thermal side of its business.
Natural Resource Partners' business is more dependent on met, which accounted for 28% of its production in the second quarter, but 40% of revenues. In fact, the company attributes most of the decline in its coal revenues to the weak met market. This is clearly an issue that unitholders need to watch.
Good and bad
So while some companies are benefiting from exchange rates, others are clearly suffering for them. Look for a weak Australian dollar to continue dragging on results at Walter, Rhino, and Natural Resource Partners. Until there's a notable shift, U.S. coal miners will be at a cost disadvantage. That's a big long-term concern if players like BHP and Peabody expand their met market share and manage to keep it.
