Well-respected energy intelligence company Wood Mackenzie recently released its 2015 global coal outlook. For the most part, the report held nothing but bad news for U.S. coal stocks as its analysis suggests that U.S. producers are the most at risk from the "difficult months ahead" for the coal industry. That being said, Wood Mackenzie did see upside for Australian coal producers, which is great news for Peabody Energy Corporation (NYSE:BTU) as its Australian subsidiary should benefit from this outlook.
Still too much coal
Overall, Wood Mackenzie still see too much coal hitting the market this year. This is despite the fact that U.S. coal companies have continued to cut back capacity. Alpha Natural Resources (OTC:ANRZQ), for example, recently announced it was downsizing its West Virginia mining operations by idling coal mines in the state. These mines had produced 1.5 million tons of thermal coal last year. However, weak coal demand and depressed prices forced the company to cut back on its output.
There's too much coal on the market because of continued weak demand. Coal-fired power plants in the U.S. are being retired and replaced with natural gas. Meanwhile, once-robust Chinese demand for coal is weakening and causing demand to be lower than forecast. This is leaving U.S. coal producers with few options other than to continue to cut capacity and hope they can last until the coal market turns around.
Why Australia is winning
While things are really bad for U.S. coal producers, it's less bad in Australia. That's because its coal producers have two big advantages over their American counterparts. First of all, its closer proximity to Asian markets means it's less costly to ship Australian coal to customers. On top of that, its coal is cheaper to produce, which gives it another big advantage over U.S. coal companies. This has helped Australia take a greater share of the global seaborne coal market, as its share went from 58% in 2013 to 64% last year.
Peabody Energy was one of the beneficiaries of this rise as its Australian coal shipments rose 9% last year to 13 million tons of export coal. That helped to mitigate some of the impact of lower coal prices, which were down 16%. Also helping to mitigate some of the impact of lower coal prices was an 8% decrease in unit costs. That being said, the company's margins are still really thin, as it needs to get its costs down in order to benefit from the much higher prices it receives for its Australian coal.
Looking ahead to 2015, Wood Mackenzie sees Australia's overall outperformance continuing, and even strengthening. This is partially because of the country's overall lower costs when compared to U.S. producers, but also from a new catalyst as the country's producers are also starting to benefit from currency depreciation. That's a new wrinkle that will add to the pain of U.S. coal producers as they deal with a strengthening dollar.
Waiting for a turn
U.S. coal producers are well aware of the challenges they face in the year ahead. In its recent quarterly report, Arch Coal (OTC:ACIIQ) noted that it sees challenges both at home and abroad in 2015. However, it does see some green shoots to give it hope for the future. These include above-average growth in the European steel sector, which should lead to demand growth for metallurgical coal over time.
Meanwhile, it still sees strong future demand growth in Asia as its middle class continues to grow. That growth is fueling 150 gigawatts of new coal-fueled power capacity that's under construction and should all be operational by 2018. That alone will fuel another 440 million tons of coal demand in the years ahead, which should benefit all producers.
There are few positives in the oversupplied coal market these days, which has depressed coal prices. That said, Australian coal operations remain in the best position to succeed as that country has lower costs and better access to market. This is a positive for a company like Peabody Energy, which has an Australian coal business, but more bad news for other U.S. coal stocks.