Peabody Energy (NYSE:BTU) recently turned in a lackluster quarter. Weak coal prices were too much for the company to overcome, despite the fact that its sales volume increased by 7%. That being said, Peabody Energy sees some positives on the horizon, specifically China's new urbanization plan, which should lead to rising coal prices in the future.
The great relocation
In late March, China approved its long-awaited plan to move more of its people into the cities in order to boost economic growth. The urbanization plan will shift about 15-20 million people each year through the end of the decade. That could lead to more than 100 million people becoming urbanized as the country works toward a goal to have 60% of its 1.3 billion people living in urban areas by 2020.
The cost of the plan is a mind-bending 42 trillion yuan, or about $6.8 trillion. This spending will necessitate increased infrastructure spending including rail networks, new buildings, and new coal-fired power plants. It's the likelihood that coal will be a big part of these urbanization plans that have American coal producers like Peabody Energy planning for a market rebound.
More coal on a boat to China
In addition to the urbanization plan, China also plans on closing more than 1,700 smaller coal mines in the country. This has the potential to reduce capacity by nearly 120 million tonnes as these mines are taken offline. That's great news for coal exporters like Peabody Energy, which continues to enjoy strong coal exports to China. In fact, through March of this year coal imports in China are up 5% to 84 million tonnes. The combination of reduced Chinese capacity with an increase in demand from the urbanization plans looks to be a big opportunity for U.S. coal producers.
The other big impact of Chinese urbanization will be the increased need for steel. This should help metallurgical coal producers like Walter Energy (OTC:WLTGQ) as it should yield push up demand for metallurgical coal. Walter Energy is already looking for ways to increase its access to coal export capacity so it can get more of its coal into world markets and profit from Chinese growth. The company is currently seeking to build the Blue Creek Coal Terminal in Mobile, Alabama. But Walter Energy is running into problems as the city's zoning oversight has turned into a real battle.
Walter Energy needs the new facility in order to give it a market outlet for the increase in supply from a new mine. One of the reasons Walter Energy needs access to additional export capacity is because the state-owned McDuffie Coal Terminal, also located in Mobile, is already seeing really strong coal volumes, which is currently running about 19% ahead of budget. Needless to say, China's great relocation plan is expected to increase the world's demand for all forms of coal.
Right now China really holds the keys to the future of the American coal industry. Not only will it be importing more thermal coal coming from Peabody Energy, but it will need more steel, which will help metallurgical coal exporters like Walter Energy. That being said, China still might not be enough to make either coal producer a buy.