The biggest floods in Queensland, Australia, in half a century are turning into a windfall for U.S. coal mining companies anticipating record profits and the highest exports in 15 years.
Shipments from the U.S. are poised to rise 8.8 percent this year to about 86.5 million tons, the most since 1996, the Energy Department in Washington said Feb. 8. Demand for American coal is increasing after floods devastated an area of Australia twice the size of Texas. Queensland’s combined output of steelmaking and thermal coal may be reduced by 23 million metric tons, Bank of America Merrill Lynch said in a Jan. 25 report. That’s about 13 percent of the state’s exports in the year ended in June.
Disruptions will drive the average price of U.S. Eastern coal used to make steel up 13 percent to $254 a ton and the fuel used in power plants to $74 a ton, 20 percent higher than a year ago, according to the median of 11 analysts in a Bloomberg News survey. That may spur a fivefold profit gain for Alpha Natural Resources Inc. and 75 percent for Walter Energy Inc., while boosting President Barack Obama’s goal of doubling exports by 2014.
“Are we pushing the price? You’re damn straight we are,” said Bob Pusateri, executive vice president of sales and marketing at Canonsburg, Pennsylvania-based Consol Energy Inc., which operates 18 mines across six U.S. states. “If there is a short-term phenomenon because of weather-related issues, the coal companies are going to take advantage of it.”
Shipping Abroad
Producers across the U.S. are looking to ship coal abroad as economic growth in Asia outpaces the rest of the world while domestic use declines. Asian demand for steelmaking coal shipped by sea will rise 3.6 percent this year to 171 million tons, Arlington, Virginia-based FBR Capital Markets Inc. forecast on Jan. 14. U.S. coal use is expected to drop 0.8 percent this year, according to the Energy Department.
Production shortfalls in Asia are providing U.S. companies with an advantage. Coking coal from Australia used to forge steel sold for an average of $325 a metric ton in the week to Feb. 4, exceeding the record $300 a ton set in 2008 when there was also flooding, according to IHS McCloskey, a Petersfield, England-based researcher.
Power station coal at the country’s Newcastle port, a benchmark for Asia, has soared 44 percent since Jan. 1, according to data from IHS McCloskey and Bloomberg.
Transport Bottlenecks
The biggest challenge for U.S. mining companies may be getting coal from the mine to the train and moving it to the port as railroads struggle to meet increased demand after they furloughed employees and idled units amid the recession.
Norfolk Southern Corp. said it had 11,212 train and engine employees in the fourth quarter, down about 7 percent from the end of 2008. The railroad said it plans to boost headcount this year. CSX Corp., the second-largest publicly traded U.S. railroad, cut 1,882 employees, or 6.3 percent of its workforce, since December 2007, according to data compiled by Bloomberg.
U.S. exports sank 29 percent to 80 million tons in 2010 from a record 112.5 million tons in 1981 as Australia dominated world markets and prices slumped, according to U.S. Energy Department data.
Rail carloads for coal rebounded 22 percent to 109,651 in 2010 from 89,465 in 2009, the lowest level in at least 16 years, according to data from the Association of American Railroads. A typical train car can hold 100 tons of coal.
Export Opportunities
“Rail, ports and producers need to get in sync and there’s plenty of incentive for them to do so given where prices are,” said Mike Dudas, an analyst at Jefferies & Co. Inc. in New York whose ratings on 21 commodity companies earned investors a 39 percent return in a year. “Additional exports north of 10 million tons seem like a reasonable expectation right now.”
In his State of the Union address on Jan. 25, Obama reiterated his goal of doubling U.S. exports in the next three years to promote job growth as the country recovers from the worst recession since the Great Depression. Unemployment has been at least 9 percent for seven months, the longest stretch in six decades.
Abingdon, Virginia-based Alpha may earn $4.32 a share this year, up from the record $2.36 in 2008, and 80 cents last year, according to the median of 11 analyst estimates compiled by Bloomberg. Walter’s profit may increase to $13.37, the data show. Consol may earn $2.85 a share, a 78 percent increase from a year earlier, and International Coal Group Inc., may have a fourfold increase to a record 64 cents.
Alpha gained 21 percent in the past year to $53.79 a share. Walter soared 58 percent to $119.23. Consol dropped 3.1 percent to $47. International Coal more than doubled to $9.30.
Massey Takeover
The world’s appetite for coal is so great that Massey Energy Co., the largest U.S. Central Appalachian producer, has had trouble finding skilled workers.
“Qualified and experienced underground miners are in increasingly high demand as prices for metallurgical coal continue to rise,” the company said Feb. 1, noting that it added two Saturday shifts until it can expand its workforce of 7,359 in December.
Alpha agreed on Jan. 29 to buy Massey for $8.5 billion, including debt, 21 percent more than the share price at the time, to create the world’s third-largest producer of steelmaking coal.
Eager Customers
Scott Pack, president of coal sales at Alpha, said customers are flying to visit him rather than the other way around.
“We’re seeing this phenomena with all the producers to work with the railroads and barge companies to get it to the coast so that we can serve this growing need worldwide,” Pack said in a telephone interview last month.
The U.S. produced about 1.08 billion tons of coal in 2010, according to Energy Department data. That’s set to climb 0.5 percent in 2011 to about 1.09 billion tons, the department said in its Short-Term Energy Outlook on Feb. 8.
About 15 million to 20 million tons of coal may be lost from Australia because of the flooding and that’s exacerbated by inclement weather in South Africa, Colombia and Indonesia, Peabody Energy Corp. Chief Executive Officer Gregory Boyce said on a Jan. 26 conference call. That’s about 0.3 percent of 2009’s global coal production, according to Energy Department data. Peabody is the largest U.S. coal producer.
Queensland’s Shortfall
The Queensland Resources Council estimates lost coal output of at least 15 million tons. The floods covered an area the size of France and Germany at their peak, swamping mines, railways and damaging bridges.
Queensland’s coal exports rose 15 percent to a record 183.1 million tons in the 12 months ended June 30, underpinned by demand from Asia, Andrew Fraser, the state’s treasurer, said in August. This compares with 159.3 million tons the previous 12 months.
The BHP Billiton-Mitsubishi Alliance, known as BMA, the world’s biggest exporter of coking coal, said on Jan. 20 that it expects “an ongoing impact on production, sales and unit costs for the remainder of the 2011 financial year,” ending in March because of the flooding.
Demand for the fuel is part of a wider trend, said David Khani, an analyst at FBR, whose ratings on eight coal companies earned investors a 52 percent return in a year.
“We like to call it ‘coalbilization,’” Khani said. “All of these things that are out of the norm are just exacerbating the underlying trend, which is supply can’t keep up with demand. What’s going on in Australia impacts what’s going on in Central Appalachia and Northern Appalachia.”