Supply crunch
One of the reasons that Peabody Energy Corporation (NYSE:BTU) was able to generate better-than-expected earnings this past quarter was because of its ability to bring down costs. The highlight of these measures was a 20% reduction in the cost of making pulverized coal at its Australian operations. Whether or not the rest of the industry can replicate these levels of cost savings is yet to be seen, but according to Peabody CEO Greg Boyce, the current price levels are unsustainable: “[We] continue to expect U.S. markets to improve as stockpiles normalize and noncompetitive production is removed from the system.”
More specifically, Boyce is referring to Central Appalachian coal production. Of all the coal mining in the U.S., Central Appalachian is under the most pressure today. Despite its higher heat quality, Central Appalachian coal has to compete harder with natural gas than other coals thanks to the proximity to the Marcellus shale, the mining seams are becoming less productive, and the region is under the most environmental pressure compared to other coal centers in the U.S.. If Central Appalachian coal were to fall under more pressure, it could make U.S. supplies much tighter and lead to better pricing for Powder River and Illinois Basin coal.
This is very good news for Peabody Energy Corporation (NYSE:BTU), as the company has no assets in the Central Appalachian Basin right now. It may be more discouraging for competitors CONSOL Energy Inc. (NYSE:CNX) and Alpha Natural Resources, Inc. (NYSE:ANR), which rely heavily on Central Appalachian coal.
Right now, there are several Australian assets up for grabs because mining giants Rio Tinto plc (ADR) (NYSE:RIO) and BHP Billiton Limited (ADR) (NYSE:BHP) are both looking to shed their coal assets. This could be an opportune time for a company like Peabody Energy Corporation (NYSE:BTU) to strengthen its international presence or a competitor like Alpha Natural Resources, Inc. (NYSE:ANR) to trade up from its Central Appalachian assets and expand outside the U.S.
What a Fool believes
There are several opportunities for coal companies out there, but it’s becoming more apparent that coal companies will need to pick their spots. It appears, though, that Peabody has selected well and could be well positioned if all these signs were to lead to a surge in coal.
The article Peabody Energy: 3 Signs That Coal Is Surging originally appeared on Fool.com and is written by Tyler Crowe.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool. The Motley Fool has no position in any of the stocks mentioned, either.
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