“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).
Chinese Growth
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.
Rough Market
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.
Diversification
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.
Steel
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.
The company lost money in 2011 and 2012 as it adjusted to weakening coal markets. That included closing plants and working on cost reductions. The company has been successful in its cost containment efforts over the last few quarters, though what it really needs is an uptick in demand and prices.
While Peabody Energy Corporation (NYSE:BTU)’s shares have fallen steeply over the past year, Alpha’s price has pretty much collapsed. The fact that Alpha Natural Resources, Inc. (NYSE:ANR)’s loss in 2012 was about five times the size of Peabody’s has a lot to do with this. However, this price disparity suggests that there is more upside in Alpha Natural Resources, Inc. (NYSE:ANR)’s shares when the coal industry returns to favor. That’s particularly true if met coal prices pick up on renewed Asian demand.
In the Market
Yanzhou Coal Mining Co Ltd (ADR) (NYSE:YZC) is a Chinese company. It owns mines in its home country and in Australia. Although it has grown its top line each year since 2009, recent results have been weak on a year-over-year basis. The company has been offsetting weak pricing with production growth, but that tactic hasn’t been enough lately. Quarterly sales have declines in each of the last three quarters on a comparable basis.
Although the company spilled some red ink in the September quarter, it has been profitable on an annual basis throughout this difficult period, unlike most of its peers. With the most direct exposure of this trio to China, Yanzhou Coal Mining Co Ltd (ADR) (NYSE:YZC) is a fairly aggressive play on Asia’s growth. Keep in mind, however, that accounting in China isn’t always as clean as U.S. investors might expect. So, there are potential risks that go beyond the coal market’s malaise.
Watch Asia
There are positive long-term trends afoot in the coal market. Growth in Asian demand is chief among them. The three companies above have direct ties, in varying degrees, to the region. Peabody Energy Corporation (NYSE:BTU) is probably the most diversified and safest option. Alpha Natural Resources, Inc. (NYSE:ANR)’s connection is in its large met coal export business. China-based Yanzhou Coal Mining Co Ltd (ADR) (NYSE:YZC) is the most direct bet on Asia and the most risky.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article China Loves Coal and So Should You originally appeared on Fool.com.
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