China uses and produces a huge amount of coal. With the increasing concern over human safety and the environmental impact of coal mining, the government is set to close 2,000 mines by the end of 2015. That will benefit coal miners like Peabody Energy (NYSE:BTU), BHP Billiton (NYSE:BHP), and Rio Tinto (NYSE:RIO).
Shutting them down
China is dotted with small coal mines. Many have high incidence rates and produce lower-quality coal. The government has closed over 1,300 mines so far this year and plans to shutter another 2,000 by the end of 2015. It's targeting mines that produce less than 90,000 tons of coal.
The impact of a single mine of this size is immaterial, but when looked at over the 3,000-plus mines being closed, the numbers start to add up. Assuming the average closed mine is producing 50,000 tons of coal, the government is going to remove around 150 million tons of coal from the market.
Peabody notes that China's coal imports rose 13% in the first half. Management believes the country's imports will be between 310 and 330 million tonnes this year. China is going to continue investing in larger and safer mines to make up for the slack created by the closures. But, in the meantime, the country is going to need to make up for that lost production and foreign markets are going to be key players.
A ready supplier
Malaysia, which is a coal export powerhouse, is going to be there to help fill the void. However, Cloud Peak Energy (NYSE:CLD) notes that Malaysian coal is at the lower end of the quality spectrum, particularly compared to its U.S. Powder River Basin coal. That's a positive sign for Cloud Peak's export hopes, particularly as China looks to clean up the most obvious pollution problems related to coal. Right now, Cloud Peak exports about 5% of its coal, but it plans to increase that as U.S. ports increase their capacity.
Having to wait on ports, however, is a clear negative since the closures are taking place today. Peabody, with notable operations in Australia, is much better situated. While Cloud Peak's main market is South Korea, Peabody serves a much more diverse list of customers, including India. That country increased its coal imports by over 40%. Any increase in coal demand from China will have a direct impact on the coal available to serve India's voracious appetite, as well.
More than coal
Rio Tinto and BHP Billiton are two more big coal players in Australia. Although both companies generate far more revenue from their iron ore businesses, coal remains an important piece for each. And they have been working on cutting costs and increasing productivity to better compete. That's largely because of a global coal downturn. Actions like those being taken in China, however, are helping to clear that overhang.
Unlike coal-focused Peabody, both Rio Tinto and BHP remain solidly profitable. And while Cloud Peak isn't losing money, it earned less than a dime a share in the second quarter—down from over $0.50 a year ago. That trend is clearly going the wrong way and Cloud Peak doesn't have the same market access as Rio, BHP, or Peabody.
The signs of a clearing market
Although China closing tiny mines may not seem like a big deal, it's an important sign that the "invisible hand" is working supply and demand into balance. That will, eventually, lead to an upturn in the coal market. BHP, Rio Tinto, and Peabody are all positioned to benefit right now from China's environmental shift and over the longer term. And Cloud Peak, which is waiting for port access today, should be ready for the day when supply and demand have evened out.
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.