Peabody: China, India Leading Coal "Supercycle"

While U.S. coal production has been stagnant in 2010, demand for coal in China and India has sharply risen this year and could represent the early stages of a "long-term supercycle" for the global coal industry, according to Peabody Energy, the world’s largest private coal company. 

In addition, in another bullish sign for Asian coal markets, Indian newspapers reported that government-owned Coal India saw robust investor interest in its initial public offering of stock, in which the government is selling 10% of its interest in the world’s largest coal producer.

Peabody outlined its upbeat outlook in a quarterly earnings report that said ravenous coal demand in Asia and India had led to sizzling performance by its rapidly expanding Australian operations, with income before interest, taxes, depreciation and amortization (EBITDA) at the unit soaring to $323.4 million, nearly triple the earnings seen in the previous quarter.

The St. Louis-based company said overall U.S. coal production was down 2% from last year but that its U.S. operations squeezed out a 6% increase in EBITDA due to rising prices and cost containment.

Peabody also said it was seeing higher prices and lower customer inventories in the U.S. coal market, setting the stage for coal operators to recover 60 to 80 million tons of demand in 2010 from a combination of weather, new coal-fueled plants, less coal-to-gas switching, and increased exports.

However, the company said the coal industry’s future clearly lay in Asia and India, where it sees long-term growth continuing for decades and requiring more than 1 billion tons of additional coal production worldwide.

"Peabody believes that the global coal industry is in the early stages of a long-term supercycle, led by China and India," Peabody Chairman and Chief Executive Officer Gregory Boyce said in a statement.

"Year-to-date demand for seaborne metallurgical and thermal coal products is very strong in the Pacific, averaging 15% above prior-year levels due to increased needs of China, India and other Asian nations that continue to recover from the recession," the company added in a press release.

Among other key trends, Peabody said China’s coal-fueled power generation is up 19% and steel production has risen 15% year to date. China’s net coal imports through August were 60% above the prior year.

The company said India’s coal imports have increased nearly 30% year-to-date through September, and total 2010 imports are expected to reach 100 million metric tons, 36% above 2009.

Global seaborne metallurgical demand is expected to reach a record 270 million metric tons in 2010, a 35% increase over 2009, according to Peabody, which also said seaborne thermal coal demand in the Pacific is expected to rise more than 15%, exceeding 500 million metric tons for the first time.

"Longer term, the ongoing economic development in China and India is anticipated to continue for decades, requiring vast amounts of electricity and steel," the company said in its press release. "Over the next five years, approximately 390 gigawatts of new coal-fueled generation are expected to be installed around the world and would require 1.2 billion metric tons of additional coal annually."

Peabody’s view about China was echoed by an analysis released this week by McIlvaine Co., a Northfield, Ill.-based market research and engineering consulting firm, that said that China is installing more coal-fired boilers and sulfur dioxide scrubbers than the rest of the world combined. Most of the new generation features ultra-supercritical combustion technology, the most energy-efficient technology available for pulverized coal.

As for the U.S. coal market, Peabody indicated that it did not expect the U.S. recovery—and U.S. coal demand—to really pick up steam until 2012.

It said it planned to make only 10% of its 2011 production open to spot pricing, but that it would make 35% to 45% open to pricing by 2012 and then 85% by 2013.

Peabody said its operational focus would be in the Illinois Basin, with production expanding in its new Bear Run mine in Indiana and Gateway mine in southern Illinois.

For the third quarter, Peabody reported total EBITDA of $571.3 million, a 67% increase from the same quarter in 2009. Adjusted diluted earnings from continuing operations rose 102% to 99 cents per share.

Peabody, which had 2009 sales of 244 million tons and $6 billion in revenues, fuels 10% of the U.S. power plant fleet and 2% of global electricity generation

—George Lobsenz is executive editor The Energy Daily, where this first appeared.