Many coal companies such as Alpha Natural Resources (
ANR
) and Peabody Energy Corporation (
BTU
) are mulling over the fate of coal as consumption has continued to
decline in the U.S.. Natural gas has undoubtedly given coal
companies a run for their money since prices began to slide last
year. Moreover, the Environment Protection Agency's (EPA) recent
regulation to cut emissions will reduce coal-fired power generation
in future, which is hurting demand, and it is estimated that nearly
40-60 GW of coal-fired generators will retire by 2020.
In view of all this, Alpha needs to lay out a strategy to
streamline its operations to cater to foreign markets. India and
China have demonstrated an enormous appetite for coal, riding on a
high level of industrialization and urbanization. However, the two
most important questions to be answered are: is the export market
large enough to make up for the dip in domestic coal demand, and
how long will it take for companies in the U.S. to be able to take
advantage of the export markets?
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Unlike Western economies, South
-
East Asian economies such as India and China still heavily rely on
coal for meeting their power requirements. Further, these nations
are developing at a rapid pace, resulting in significant
infrastructure developments. This has led to increased use of
coking coal in these countries, which is used for manufacturing
steel, a basic building material. The demand for coal, as a result,
is significantly high in this region both in thermal and
metallurgical coal.
China is one of the largest importer of coal as Chinese utility
companies have heavily relied on imported coal because it's
cheaper. The coal from South Africa, Australia and the U.S. is
considerably cheaper than the domestic ones. According to the
latest reported data, China imported a total of 140 million tons of
coal in first half of 2012, implying a 66% y-o-y growth. This
incredible growth is largely due to a phenomenal increase in the
met coal demand. Met coal imports increased by whopping 175%,
making 43.6 million tons of the 140 million tons of total import.
Asia's total thermal coal demand is estimated to be at 550 million
tons.
Another large coal importer India will import more than 80
million tons of thermal coal in FY2012-13. These two nations -
India and China - together have a import requirement of close to
300 million ton a year of thermal coal and 70 million ton a year of
met coal. These are significant export opportunities for Alpha.
However, there are some risks to these market. Australia and
South Africa are geographically closer to India and China, which
gives them an edge with shipping costs. Secondly, the coal
inventories at Chinese coal suppliers have been piling up. They are
likely to soften prices to clear up their stocks, which may slow
import activities in China.
The export facilities in the U.S. are presently inadequate to
facilitate high volumes of coal export. However, the shipping
companies are streamlining their businesses to cater to coal
export. The terminals are being constructed on the Gulf and East
Coast.
We expect over a period of next 2-3 years, the facilities will
be ready. So, it can take some time before coal companies in the
U.S. can take advantage of the booming Asian coal market. Alpha
shipped a total of 107 million tons of coal in 2011, of which 16.3
million ton was exported. Of the exported coal, the majority was
met coal, which sells at a higher price. We believe the company can
make up for the loss of domestic thermal coal volumes by met coal
exports in the near-term, which could help the company to fend off
the decline in revenues caused by domestic coal slump.
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