Coal Stocks: Riding The Coal Supercycle For All Its Worth
Back in July I recommended buying shares of leading coal producer Peabody Energy (BTU). I explained how the company was cashing in on voracious coal demand from China.
I hate to brag… but we called it perfectly… we’re up 23% on the trade already!
With the company recently reporting earnings, now’s a perfect time to let you know what to do now. In case you missed it, here’s a quick recap of their third quarter numbers…
Revenue jumped 12% to $1.9 billion. Operating profit more than doubled to $445 million. And earnings surged 102% to $0.83 a share. A terrific quarter any way you slice it.
Robust demand from China and India drove results.
China’s coal-fueled power generation is up 19% so far this year. And steel production has increased an impressive 15%. As a result, China’s importing a lot more coal this year than last.
Year to date, China’s net coal imports are up a staggering 60% over last year’s pace.
A similar story is playing out in India.
Through September, India’s coal imports are up a shocking 30%. And by the end of the year, the nation’s coal imports are expected to exceed last year’s by 36%.
This is all music to Peabody’s ears…
As I discussed in my earlier article, Peabody’s management saw this trend developing a while back. That’s why they’ve been aggressively expanding production at their coal producing properties in Australia.
Now the company’s strategy is paying off in spades.
Shipments from Peabody’s Australian mines are up 11% over last year’s pace. What’s more, insatiable demand from China and India is pushing thermal and metallurgical coal prices into the stratosphere.
Check out this windfall…
Strong demand for high quality hard coking coal has kept quarterly prices between $200 and $225 per tonne since April. That’s a whopping 55% to 74% higher than last year’s price of $129 per tonne.
And the gains in thermal coal prices aren’t too far behind. Index prices for Australian thermal coal are in the $95 to $100 per tonne range. We’re talking a stunning 35% to 40% increase over year-ago levels.
Higher sales volumes and much higher prices… you can see why Peabody had such a profitable quarter.
Best of all, the bull market for coal in the Pacific region is expected to last not for years… but DECADES!
According to Peabody CEO, Gregory Boyce, “…the global coal industry is in the early stages of a long term supercycle…” Massive economic development in China and India is driving it.
How big is this opportunity?
Over the next five years, developing nations around the world are expected to install about 390 gigawatts of new coal-fueled power generation capacity. This alone is projected to require a mind-boggling 1.2 billion tonnes of additional coal every year.
And don’t forget the anticipated increases in steel production over that same period. Global steel consumption is expected to increase more than 30%. As a result, steel makers will need more than 300 million tonnes of additional metallurgical coal annually.
Clearly, demand for both thermal and metallurgical coal is heading in one direction… UP, UP, UP!
And Peabody is carefully positioning itself to ride this supercycle for all its worth.
Right now the company’s expanding production capacity at several coal mines in Australia. Metallurgical coal production is expected to increase by 2 to 3 million tonnes annually in 2012-13. And it should get a boost by another 4 million tonnes annually in 2014.
So, what should we do now?
But the shares should move a lot higher from here over the next few years. If you already own the stock, hang on tight. New buyers should look to pick up shares on any pullbacks.
Category: Stocks
