US Coal Is King Again

01/09/2008 12:00 am EST

Focus: COMMODITIES

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliott Gue, editor of The Energy Strategist, says surging demand from Europe in particular boosts the prospects of US coal miners and he recommends a way to play it.

Coal prices are firming up, and coal stocks have rallied on the news.

In addition, exports of coal have been rising steadily since the beginning of 2007. The fall in the value of the US dollar makes US coal cheap in foreign currency terms. Therefore, utilities in places such as Europe find that cheap, abundant US coal represents a great value.

But the more important reason is simply surging foreign demand. The primary swing market for US coal right now is Europe. Coal accounts for about 50% of Germany’s electricity production, 34% in the UK and a whopping 93% in Poland.

Europe is also a big steel producer. Producing steel requires the use of a high-quality coal known as coking or metallurgical coal. Europe doesn’t have enough coal production locally to satisfy demand. Coal has traditionally been imported from places such as South Africa or even Australia. This coal, often called seaborne coal, is carried on dry-bulk carrier ships.

But China is now a net importer of coal for the first time in the nation’s history, and demand is exploding because of rapid economic growth and development. Meanwhile, India is also becoming an increasingly big exporter.

Australia and Indonesia, the world’s two largest coal exporters, are having a tough time keeping pace with the new wave of demand. The result: Most available shipments of seaborne coal are finding their way to Asia at sky-high prices.

That leaves Europe short of coal. So, for the first time in more than a decade, European utilities are actually contracting with US producers to buy coal under long-term contracts. European buyers are willing to pay prices for thermal (power plant) and met coal that are far above what’s available on the local US market.

The fact that they now want to make longer-term deals at higher prices suggests they’re desperate to secure coal supplies. The result is further upward pressure on demand for US coal.

This is all bullish for Peabody Coal (NYSE: BTU) [whose stock is up nearly 40% from its August low]. 

Peabody is the largest dedicated coal mining firm in the US. The stock is attractive thanks to its vast exposure to the US Powder River Basin, a prolific, low-cost, coal-producing basin. 

Peabody also bought a major Australian producer and exporter, Excel Coal, in 2005. This gives the company direct exposure to surging Asian coal demand. Peabody is the world’s premier coal play, and valuations have risen along with the stock in anticipation of continued firming of global coal markets.

I don’t think the run is over, however. The rise in coal prices is only starting to get noticed in the popular press, and I expect to hear news of new coal export deals as we head into the new year.  Peabody Coal remains a buy despite the big run-up in the stock. (It closed below $57 Tuesday—Editor.)

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