Peabody Energy (BTU), one of America's biggest coal producers, has had an extremely challenging year. Due to the collapsing environment for coal in the United States, Peabody's business has significantly deteriorated. Things may change next year, however, thanks to a newly announced strategic partnership with China.
China is an emerging economy with above-average economic growth. Like many other emerging nations, its millions of new middle-class entrants have a seemingly insatiable hunger for energy. This has positioned China as a major industrial purchaser of not just coal, but other basic materials. China recently made a major announcement in the fertilizer industry, and as a result, the country may make 2014 a very profitable year for any materials stock.
China to the rescue?
Peabody announced it has entered into a strategic partnership with China's Shenhua Group, which is the largest coal distributor in the world. Shenhua and Peabody will form a joint venture that will begin supplying coal in 2014.
Earlier this month, China's state-owned Sinochem extended an agreement to buy potash fertilizer from North American Canpotex, which is co-owned by fertilizer producers PotashCorp (POT), Agrium (NYSE: AGU), and Mosaic (MOS 0.26%). Canpotex will provide as much as one-third of China's potash imports next year.
This may help relieve some of the pressure on fertilizer producers, which have struggled in the aftermath of the breakup of one of the world's largest potash partnerships. PotashCorp's net sales and diluted earnings dropped 8% and 6%, respectively, through the first nine months of the year. Mosaic's diluted earnings per share collapsed by 70% in the third quarter, and for its part, Agrium saw its gross profit fall 13% in its most recent quarter.
China, which is the second-largest economy in the world, pegged its 2013 economic growth around 7.6%. Clearly, China's economic growth stands above that of the developed world, and consequently it will need a great deal of coal and fertilizer to meet the demands of a high-growth economy. As a result, China's moves mean the basic materials sector in the United States has some significant momentum heading into 2014.
China's pending imports of coal couldn't come at a better time for Peabody. The strategic partnership with China represents a major step forward for Peabody's international operations, which to this point are restricted to Australia. Business there has had its own fair share of challenges, including the recent closure of the Wilkie Creek Mine in Australia.
This is a welcome reprieve for Peabody and represents a significant tailwind, especially due to Peabody's struggles this year. Peabody's adjusted earnings are down more than 80% through the first nine months of 2013, compared to the same period last year.
And, unfortunately, full-year results aren't expected to stem the tide of deteriorating business conditions. Peabody expects U.S. revenue per ton to decline between 5% and 10% for the full year as opposed to 2012 levels. In addition, the company very recently advised investors its full-year earnings before interest, taxes, depreciation, and amortization would be $60 million to $80 million below previous targets.
The Foolish takeaway
China may make 2014 a profitable year for North American coal and fertilizer producers, which need as much help as they can get. Each industry struggled mightily in 2013. Coal usage dropped significantly in the United States due to natural-gas prices, which remained low for most of the year. In addition, potash fertilizer prices fell dramatically after the breakup of a major potash partnership.
All that may change next year, as China has stepped into the coal and fertilizer markets in a major way. China is a rapidly emerging economy and sees high demand for basic materials going forward. As a result, Peabody, PotashCorp, Agrium, and Mosaic may see business turnarounds and a strong 2014.
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