“China consumes nearly as much coal as the rest of the world combined,” explains the U.S. Energy Information Administration. That makes Chinese demand a big issue for coal companies like Peabody Energy Corporation (NYSE:BTU), Alpha Natural Resources, Inc. (NYSE:ANR), and Yanzhou Coal Mining Co Ltd (ADR) (NYSE:YZC).
Between 2000 and 2011, coal consumption throughout the world minus China increased from 3.8 billion tonnes to 4.3 billion. Chinese demand, meanwhile, increased from 1.5 billion tonnes to 3.8 billion. According to the EIA, “a more than 200% increase in Chinese electric generation since 2000” is the main reason.
That said, China's construction boom has also been a huge driver of metallurgical coal demand. So-called met coal is used in the steel making process.
Low natural gas prices in the United States, however, resulted in declining demand for coal as U.S. electric utilities switched to the cheaper fuel alternative. And, China's economy cooling off led to declining demand for met coal. Increasing production levels in Asia have also hurt pricing. That has resulted in a buyer's market for coal around the globe and a sell-off in coal stocks.
Now for the Good News
That said, China isn't done building coal fired electric plants and India is starting to get in on the act, too. For example, Peabody Energy Corporation (NYSE:BTU) expects China to increase its coal imports by 200 to 250 billion tonnes between 2011 and 2016. India, meanwhile, is projected to increase imports by 100 to 150 billion tonnes. Those two countries account for nearly three-quarters of the growth Peabody is forecasting.
Much of that coal is going to feed new and existing power plants. However, both nations need so much power because of rapidly emerging middle classes. That will lead to infrastructure spending, which means increased demand for met coal, too.
Peabody Energy Corporation (NYSE:BTU) is the most diversified coal option. The company has large coal operations in the US and in Australia. Its U.S. operations have been a focus as coal competes with low-priced natural gas. However, the jewel in the rough is Australia. This operation positions the company to easily export coal to Asia.
In fact, the country was the second largest coal exporting country behind Indonesia in 2011. So, as China and India increase consumption, Peabody will be right there to go along for the ride. That said, revenues have been lower on a year-over-year basis in each of the last four quarters. Earnings were weak, as well. One-time charges to adjust production were the big factor in the fourth quarter's notable red ink.
Despite current weakness, investors looking for a turnaround play should strongly consider this coal miner because of its direct exposure to Asia.
Alpha Natural Resources, Inc. (NYSE:ANR)'s mines are all located in the U.S. It has operations in both thermal and met coal. It is, however, the number three met coal producer in the world based on volume. One of the primary markets for U.S. met coal is Asia.