Fake safety certificates have shuttered three of South Korea's 23 nuclear power plants. Similar issues have delayed construction plans on several new plants. Now there is talk of the country following Japan down a path to fewer nuclear plants—which would be a boon to other energy suppliers.
A hundred strong
South Korea has indited over 100 people as it examines a safety scandal causing a public relations nightmare for its nuclear power industry. This backs up against a government working group suggestion that the country become less reliant on nuclear power after Japan's Fukushima disaster. The recommendation: Keep nuclear at about the same percentage of the power pie that it holds today. The existing plan was to increase nuclear to around 40%.
Coal and liquefied natural gas provide about 30% and 25% of South Korea's power, respectively. That means these two industries would likely see increased demand if the government goes along with the working group's recommendations. Both will be watching the progress on this front closely, as should you.
A big player
For example, Cloud Peak Energy (NYSE:CLD) is the largest U.S. coal exporter to South Korea. Even if coal isn't the biggest beneficiary of a switch, increased demand is likely. The high cost of importing LNG almost guarantees this. And a slow-moving shift would probably be the best thing for Cloud Peak.
That's because the miner is waiting on new ports before it can ramp up its exports. That won't happen until 2018, at the earliest. But it isn't sitting on its hands. Cloud Peak recently sent coal to Japan for that country's power plants to use as a test. Japan, of course, is looking for options now that its nuclear fleet is idled and, despite the dirty image, coal is cheaper than LNG.
Most U.S. coal miners are looking to tap into foreign demand, too. Like Cloud Peak, though, finding enough export capacity is an issue. That said, low coal prices across the globe have probably been a bigger hurdle.
That's where globally diversified miners like Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP), and Peabody Energy (NYSE:BTU) have an advantage. All three have notable coal operations in Australia, which is just a hop, skip, and a jump away from South Korea, Japan, China, and India.
Of the three, BHP has been the best performer on the earnings front. While earnings have been weak over the past year or so, the company has remained comfortably in the black. Rio, meanwhile, posted a loss in 2012 because of a writedown in its aluminum business. Peabody Energy's large 2012 loss was the result of a writedown, too, but profits have been touch and go since.
It's no wonder that Peabody's shares have fallen over the past year while BHP and Rio have held up relatively well. That said, the break-even performance is hardly compelling when compared to the broader market. And the diversification that has helped the pair outperform Peabody also limits the potential benefit that increased coal sales to South Korea and Japan can provide to the top and bottom lines. In fact, both earn far more from iron ore sales than coal.
Another positive sign
South Korea debating its nuclear reliance is another positive sign for a relatively cheap fuel source like coal. If you like the prospects that Asian demand offers, Cloud Peak looks set to grow its business in the market if it can get its domestic coal into international waters. Peabody is already in the region and serving key countries. If you are still concerned about the coal markets, however, a diversified option like Rio or BHP might make more sense. That said, you'll need to keep the pair's heavy reliance on the steel industry in mind as you dig into their numbers.