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Australia’s coal industry has faced seemingly constant problems in the past few months, but Peabody Energy believes that it is still the place to be.
The Australian coal industry has been much maligned of late as coal producers in the country cut costs and reduce production and China, one of the main buyers of the nation’s coal, makes plans to lower its coal consumption. However, Peabody Energy (NYSE:BTU), which recently surprised analysts by posting a second-quarter net income of 33 cents per share, is not ready to give up.
Speaking after the release of Peabody’s quarterly report, Greg Boyce, chairman and CEO of the US coal giant, said that Australia’s “proximity to the best end markets” and the declining dollar are making its coal assets increasingly attractive to major global coal companies.
“We’re starting to see Australia come back into the competitive range that it always held in terms of the global seaborne market. So I think Australia is still a place that you want to have quality assets, and that’s why we’re there,” The Australian quotes him as saying.
What will drive Australian coal demand?
Specifically, Peabody believes that three main developments bode well for coal, according to The Motley Fool. Here’s a brief look at those factors:
- Coal-powered energy to increase: Although natural gas took over a large part of coal’s market share during 2011 and 2012, since then coal has expanded to a more dominant position. Most significantly, this year 75,000 megawatts of coal-fired energy generation capacity is set to come online — according to the news outlet, that “is the equivalent of the U.S. expanding its entire coal-generation fleet by almost 20%.”
- China needs coal: China’s plan to reduce its coal consumption involves curbing its reliance on low-quality Indonesian coal, meaning that it will be shifting its sights to coal from the US and Australia.
- Central Appalachian coal facing pressure: In terms of US coal, Central Appalachian is currently facing the most pressure because it “has to compete harder with natural gas than other coals thanks to the proximity to the Marcellus shale.” That could prove beneficial to Peabody as it does not currently have any Central Appalachian coal assets.
The cost of staying
However, staying in Australia in the hope of eventually benefiting from these factors is not without costs. Another article published by The Australian notes that after cutting 170 jobs this week, Peabody has now axed a total of 620 jobs in the last several weeks. It also recently decided against hiring 230 people.
Explaining the choice, Peabody said, “[t]his difficult decision has been made in response to near-term global economic challenges. The reduction has been made to align the company’s workforce size with other cost-reduction activities, as part of a comprehensive cost management review to secure the long-term competitiveness of our operations.”
Boyce has blamed the country’s carbon tax and renewable energy target for the sector’s problems and believes that whoever wins the federal election should take action to both reverse that tax and “streamline the project permitting system,” states The Australian.
In total, 11,000 jobs in the country’s coal sector have been cut between May 2012 and May 2013 — that makes the commodity the hardest hit in Australia.
When will the tide turn?
Peabody appears certain that the tide will ultimately turn for Australian coal, but based on the factors cited by The Motley Fool, the company may still have awhile to wait.
For now, investors should consider watching what happens in the lead up to the Australian election. A date has not yet been set, but reports indicate that it likely will happen sometime after September 21.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
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