Cloud Peak Energy Inc. (NYSE:CLD) is increasingly looking abroad for growth. Although Asia is expected to drive coal demand over the long term, there are some headwinds investors need to think about.
In 2008, Cloud Peak Energy Inc. (NYSE:CLD) sent less than 1% of its coal production to Asia. Management is projecting that number to hit 5.5% in 2013. Although this isn’t exactly breathtaking growth, it has come at a time when coal demand in the United States has been falling. In 2011, the company sold about 91 million tons of coal domestically, last year that fell to around 86 million. The projection for this year is about that level, or slightly lower.
Clearly, coal demand from Asia is important for Cloud Peak Energy Inc. (NYSE:CLD)’s near-term results. However, to “maximize exports” is a key long-term growth platform, too. That makes sense as the U.S. Energy Information Administration (EIA) notes that exports to Asia have grown from about 7% of the U.S. export total in 2007 to 25% last year. However, they still represent just 4% of Asia’s total imports so there’s still growth potential.
That said, there are a few headwinds to keep in mind. First, Cloud Peak Energy Inc. (NYSE:CLD)’s largest Asian market is South Korea. That country is relatively mature compared to China and India. Peabody Energy Corporation (NYSE:BTU), for example, is expecting 90% of the global demand growth for coal to come from the latter two countries.
So, while Cloud Peak Energy Inc. (NYSE:CLD) is selling into Asia, South Korea isn’t the “sweet spot.” That’s one reason to favor a company like Peabody Energy Corporation (NYSE:BTU), which has material operations in Australia that give it direct access to both China and India. In fact, Peabody Energy Corporation (NYSE:BTU) is already selling more than twice as much thermal coal from Australia alone to Asia as Cloud Peak Energy Inc. (NYSE:CLD)’s entire operation is.
Transportation costs and infrastructure are behind Peabody Energy Corporation (NYSE:BTU)’s lead. Cloud Peak has to mine its Powder River Basin (PRB) coal and then haul it by train to West Coast ports. It then ships the coal to Asia. There’s a great deal of expense in that process that makes PRB coal’s relatively low costs head higher quickly. Australia is clearly much closer, so shipping costs are lower.
And, Australia is more geared toward coal exports than the U.S., which has historically used its coal internally. Cloud Peak is using just three ports to send its coal overseas. With more companies looking to follow the same export model, demand for port access is increasing. Increasing demand leads to increasing costs.
From this perspective, industry giant Peabody Energy Corporation (NYSE:BTU) might be a better option for more conservative investors. In addition to its Australian operations, it also operates out of the PRB, among other domestic coal regions. Basically, anything that helps Cloud Peak will also benefit Peabody Energy Corporation (NYSE:BTU) to some degree. Moreover, the company has notable metallurgical coal operations, too. Cloud Peak is focused on coal used in electricity generation.