U.S. coal miners have been having a harder time selling coal into Asia lately. While that's bad news for domestic miners, its good news for global competitors Peabody Energy (NYSE:BTU), BHP Billiton (NYSE:BHP), and Rio Tinto (NYSE:RIO).
Australia's Bureau of Resources and Energy Economics (BREE) is projecting that the country's thermal coal exports will increase 8% in 2013, with solid demand coming from core customers Japan and South Korea, and notable growth coming from China. In fact, BREE notes that Japan would probably like to import more coal but lacks the ports to do so.
China, however, has been building ports along with coal mines and coal-fired power plants. Although it will increasingly supply its own coal and cleaner energy options are making inroads, China will still need imported coal to fill its energy needs. Filling that demand right now are coal miners in Australia, particularly Rio Tinto and BHP which have both been working on expansion projects.
Rio Tinto, for example, expanded thermal output from Australia by over 20% in the second quarter. Increased production from Hunter Valley expansion projects were part of the story there. However, productivity improvements were also important. In addition to thermal coal projects, BHP is expanding coal terminal capacity to support increased coal exports. It completed one project in fiscal 2013 that increased capacity by nearly 25% and has another similarly sized expansion in the works at another site.
BHP and Rio Tinto, however, aren't focused exclusively on coal. Peabody's entire business is coal, though only about 16% is directly tied to Australian thermal coal. That's a good thing, since shipments were flat, year over year, in the second quarter, holding its own against stiff competition. That said, Peabody remains upbeat on Asia, citing growing demand in China, Japan, and India.
Peabody also noted a massive 30% drop in U.S. coal exports in June. The company's U.S. business is virtually all thermal and accounts for half of the top line, so Peabody is "benefiting" on one side of its business and feeling the pinch on the other. Still, most of the company's U.S. coal is sold domestically, so the pinch isn't that big a deal—yet.
Meanwhile, back in the States
Peabody, like big U.S. coal miners Cloud Peak (NYSE:CLD), Arch Coal, and Alpha Natural Resources (NASDAQOTH:ANRZQ), has been eyeing Asia for growth. With a lower Australian dollar leading to a mere $2 Australian price drop compared to an $8 drop for the U.S.-based miners, it still has a leg up. This is because it can use its Australian operations to take market share from weaker U.S. competitors. When prices recover, it can fill that demand from its U.S. mines.
Cloud Peak, which expects an over 10% increase in exports this year, has the opposite problem. Although it's been able to expand exports of its low cost coal, it's waiting on additional coal terminals to notably increase them. Any market share it loses "while it waits" could be gone forever.
Though Arch and Alpha are better positioned to export, Alpha summed up the problem it and other U.S. players face in its second quarter report: "most U.S. thermal coal production, and essentially all CAPP thermal coal production, [is] uneconomic [to export]." That puts this pair at a distinct disadvantage and also helps explain why June saw such a notable export drop.
Be there or be square
Australian miners are facing pricing headwinds just like everyone else, but they are better positioned to benefit both now from a weak Aussie dollar and over the long term as they work on gaining inroads that U.S. exporters are being priced out of. That gives Peabody, BHP, and Rio Tinto an important leg up in a still growing coal market.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.