Peabody Energy: Playing China’s red-hot coal Industry
Today's Financial News - Posted October 20, 2009
The coal industry is expanding, but the growth is not here in the United States. Once again, China is in play. So are Peabody Energy (NYSE:BTU) and James River Coal (NASDAQ:JRCC).
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): There is good news from the coal industry. But once again, it has nothing to do with domestic demand. China is in charge and all indications show it will be for quite some time.
The news comes from Peabody Energy (NYSE:BTU). The $12 billion coal miner released its latest quarterly earnings before the day’s opening bell. While the Street likes the top and bottom line, savvy investors will be interested in knowing where the growth is coming from and where it will come from in the future.
It is all thanks to China.
Reports show the economically expanding country imported some 21 million tons of metallurgical coal through August, more than ten times the amount imported last year.
During the same time, China imported 38 million tons of thermal coal. Last year, it exported 7 million tons of the stuff.
Thanks to tight pricing conditions mandated by Beijing, the seaborne market appears able to keep its top spot through future years, even though domestic production can fill the bill.
The country’s leaders want to use everybody else’s coal before digging itself into a literal hole of its own.
That is good news for Peabody and its competitors.
Market manipulation pays off
Thanks to China’s increasing demand for thermal and metallurgical coal, Peabody has a strong growth opportunity on its hands. The company is working hard to cash in on Chinese demand by increasing its Australian production.
Peabody’s Australian sales estimates for 2010 are in the range of 24 to 27 million tons, about 15% higher than 2009’s figures. To help accelerate Asian sales, Peabody created a new trading hub in Singapore, plus is working on an office in Jakarta and operations in Mongolia and China.
All of this growth is happening in Asia while the domestic market is slumping by double-digit proportions. Peabody says American coal generation is down by 10% so far this year, thanks to cheap natural gas and decreased summer demand.
Fortunately, the prospect of booming overseas sales is enough to keep investors happy. Shares of Peabody are up by about 3% so far today.
Peabody’s news is boosting much of the coal industry today. One of my favorite miners, James River Coal (NASDAQ:JRCC) gapped up by more than forty cents this morning.
While James River will not directly benefit from overseas sales, the increased demand and ensuing rise in coal prices will help boost the small, well-run miner’s future earnings. Best of all, it will benefit from the industry’s overseas expansion without risking its own capital in a market that could suddenly be flooded with plenty of China-mined coal.
This is an interesting industry to watch and is certainly worthy of your investment dollars.
If you are looking for security and long-term growth, Peabody is the stock for you. If you have a bit more tolerance for risk and are looking for a shot at profiting from future domestic growth, James River is worth a look.
Either way, you are getting a shot at a vital industry at a pivotal time.
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