Peabody Energy Corporation (BTU) entered into an agreement with China’s Shenhua Group to create Sino-Pacific Coal Trading Corporation Pte. Ltd. The primary objective of this Singapore based corporation will be to meet Shenhua’s coal demand from Peabody's global coal production platform. The tie-up with Shenhua Group, which is one of the largest global coal importers, is going to boost Peabody’s sales.
Peabody has been increasing its footprint in Asia in response to the rising demand for coal in most emerging Asian countries. The global demand for coal is expected to increase by 1.2 billion tonnes in the next five years, with more than 80% of projected increase to come from China and India. Japan, in the wake of its nuclear disaster and subsequent deactivation of the reactors, could further spur coal demand.
All the large U.S. coal operators are looking to tap export opportunities to make up for sluggish domestic demand. The climate plan of President Obama, stringent regulation and compulsion to generate power from alternate sources are lowering U.S. demand for coal from the utility sector.
We believe Peabody’s operations in Australia and more recently in Mongolia and Indonesia will feed Shenhua’s demand for coal.
This 50/50 partnership with the world’s largest distributor of coal will solidify Peabody’s position in China. Shenhua Group controlled more than 65 million kilowatts of installed power generation capacity at the end of Nov 2013. The partnership is thus a strategic fit for this U.S. coal producer.
As per a U.S. Energy Information Administration (EIA) report, Asia's share of total U.S. coal exports increased from 2% in 2007 to 25% in 2012. However, it accounted for less than 4% of Asia's total coal imports in 2012, and less than 1% of total coal consumed by the four large Asian importers.
This only goes to prove that there is ample room for growth for U.S. coal producers. We expect many such large deals to follow from producers like Arch Coal Inc. (ACI) and the like.
Peabody Energy has a Zacks Rank #3 (Hold). Some better-ranked coal stocks include Alpha Natural Resources, Inc. (ANR) and Suncoke Energy Partners, L.P. (SXCP). Both the stocks carry a Zacks Rank #2 (Buy).
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