On May 9, we issued an updated research report on coal mining
Peabody Energy Inc
). Peabody is set to benefit from a worldwide revival in
metallurgical and thermal coal demand, led by continuous
urbanization and industrialization in China and India. However, an
oversupply of coal in global markets is putting pressure on prices
and affecting profitability.
Peabody Energy, a Zacks Rank #3 (Hold) stock, reported a loss of 19
cents in the first-quarter 2014, much wider than the Zacks
Consensus Estimate of a loss of 1 cent and the year-ago loss of 5
cents. In fact, the reported loss was wider than the company's
guidance of a loss of 10 cents to earnings of 14 cents for the
quarter. The downside was mainly due to lower realized prices in
spite of higher volumes sold.
The Asia-Pacific region is expected to drive global demand for coal
in the next few decades. To capitalize on the demand surge, Peabody
is expanding its presence in Indonesia and Mongolia. China is
planning to phase out low-quality coal production from its system.
As a result, the country is planning to shut down over 1,700
smaller mines with nearly 120 million tonnes of capacity in 2014.
This is expected to create fresh demand from China.
Last year, the company entered into an agreement with China's
Shenhua Group to create Sino-Pacific Coal Trading Corporation Pte.
Ltd. These initiatives will help to strengthen its footprint in the
As per the U.S. Energy Information Administration (EIA), coal will
hold a share of over 40% of U.S. electric power generation in 2014.
Per an EIA report, U.S. coal production in 2014 will increase 4.4%
year over year to 1,028 million short tons. The projected increase
in coal usage in the U.S. is attributable to higher demand for
electricity and the rising cost of natural gas. Peabody's assets
spread across the Powder River Basin and Illinois Basin will help
it to benefit from the rising demand.
However, a well-coordinated transport system plays a vital role in
the success of coal operators, as the coal producing mines are
generally situated far away from the targeted market. Coal sales
can significantly decline due to an increase in transportation
costs and the lack of sufficient rail and port capacity. Since
these factors are beyond the control of Peabody, it could largely
impact its sales volume.
Peabody will also have to ward off competition from other domestic
coal producers like
Alliance Resource Partners
Alpha Natural Resources, Inc
Arch Coal, Inc
As a caveat, increasing competition from natural gas and alternate
power generation sources will continue to affect the demand for
coal. In addition, stringent government regulations on granting
permission to coal based power units could negatively impact the
future prospects of coal miners like Peabody.
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