Peabody 3Q15 Earnings Call Notes

Peabody Energy (BTU) Glenn L. Kellow on Q3 2015 Results

Chinese steel exports have reached record levels

“China’s economy remains a key component for coal trends. Recent domestic steel consumption has declined due to oversupply in the property sector and has paved the way for a rise in steel exports, which reached record levels through September.”

Lower electricity consumption and strong hydroelectric generation have led to reduced thermal coal

“At the same time, lower electricity consumption and strong hydroelectric generation due to heavy rainfall have led to reduced Chinese seaborne thermal coal demand, which has more than offset a 70% year-to-date import gain in India.”

80% of seaborne met coal production is not covering cash costs

“we project met coal supply to fall below 300 million tons in 2015, primarily due to declining U.S. exports. And we expect additional curtailments going forward, as an estimated 80% of seaborne met coal production is not covering cash costs at current pricing.”

Capital spending by top coal producers is down 70%

“Peabody estimates that capital spending by top coal producers has declined some 70% from the historical highs we saw in 2012. We believe this limited capital investment is insufficient to sustain current production and coal prices will need to rise well above levels we see today to incentivize new investment. And over time, we expect a gradual reduction in supply as well as increased coal demand to lead to improved fundamentals.”

Despite challenges to regulations, utilities are making investment decisions that may diminish coal consumption anyways

“In regard to the U.S. regulatory environment, I would like to briefly touch on the EPA’s carbon rules. We have seen early opposition from Congress, legislatures, and other groups, and we expect the regulations to face significant judicial challenges. That’s particularly true in light of the Supreme Court’s MATS ruling in regard to EPA overreach and most recently the judicial stay of the waters of the United States. At the same time, it is imperative that courts provide clarity in swift fashion. Some utilities are already making investment decisions based on the current rules even though ultimate deadlines are still many years away. The current plan is poor policy and poor law. Even so, I would note that under the plan the EPA still expects coal to fuel 30% of U.S. electricity generation in 2025.”

Difficult if not unprecedented times for coal

“these are undoubtedly difficult, if not unprecedented, times for the coal sector”