Utilities think long-term and like supplier diversity, that's why Cloud Peak Energy (NYSE:CLD) has been sending test batches of Powder River Basin, or PRB, coal to Japan. That's a good sign for Cloud Peak Energy and the rest of the PRB focused miners, but it isn't necessarily bad news for the post-Fukushima nuclear industry.
Replacing lost power
The nuclear disaster at Fukushima essentially shut down all nuclear power plants in Japan. Coal and liquified natural gas imports have been key replacements. In its third quarter earnings call, Cloud Peak Energy noted that, "The outlook for international markets continue to be positive in the medium term due to a sustained Asian demand growth." Management highlighted demand from China, but also announced sending test coal to Japanese utilities.
The company notes that, in the near term, Asian "demand growth is being balanced by new supply from Australia and Indonesia." Competitors like Peabody Energy (NYSE:BTU), which has operations down under, are benefiting from both proximity and, recently, a weak Australian dollar. However, Cloud Peak's test shipment to Japan was about "utilities look[ing] to increase and diversify their coal supply options..." Not, inherently, finding the cheapest prices.
That's good news for Cloud Peak and other miners with PRB exposure. Of course, Peabody is one of the largest players in that coal basin, so it can be a single supplier providing coal from two different regions. Thus, the inroads Peabody is making today with its advantaged Aussie coal could help spur sales in its U.S. arm down the road.
With a diversified asset base, that also includes the low-cost Illinois Basin, Peabody is really a one-stop shop for coal exposure. However, Cloud Peak's sole focus on the PRB has provided notable benefits. For example, PRB coal remains price competitive with natural gas domestically even though gas prices are still historically low. That's allowed Cloud Peak to remain profitable through a severe coal downturn. Peabody Energy hasn't managed that feat, though it has held up better than many competitors.
And, as supply and demand balance out, Cloud Peak's cheap coal should be in high demand both domestically and overseas. The company is the largest U.S. exporter to South Korea, and is obviously trying to use this base as a way to further penetrate the Asian market. Japan could become a key customer in the region.
That makes this test important and worth monitoring. Even if it doesn't lead to huge sales gains in the near term, creating a new customer relationship in Asia gives Cloud Peak, and other PRB miners, a foot in the door to what could be an important market over the long term.
What about nuclear?
That's wonderful news, but there are still issues about how big a market Japan actually is. For example, uranium miner Cameco (NYSE:CCJ) noted in its quarterly report that "...Japanese reactor restarts continued to edge ever closer to reality." There are currently 14 Japanese reactors being evaluated for restarts.
That's good news for Cameco, which supplies fuel to nuclear reactors. However, it makes coal and uranium demand potential in Japan moving targets. Every reactor that restarts will offset coal and natural gas demand. That said, Japan is clearly rethinking its nuclear power reliance, which means that coal will be an increasingly important fuel source over the longer term.
So being in the market is important for Cloud Peak. However, Cameco, which watched industry sales to the country essentially fall to zero overnight, can also count Japan as a key long-term positive on top of the nearly 70 reactors "under construction today" around the world.
An important market
Fukushima turned the Japanese electricity market on its head. As things start to sort out, downtrodden coal and nuclear both have potential growth in the nation. For Cloud Peak it could be a vital new market and for Cameco it would be a return of previous demand. Keep an eye on both miners for clues to how big an opportunity Japan will turn out to be.