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”

Peabody Energy 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Global commodity selloff has affected coal

“ The recent sell-off in the commodities sector has resulted in significant declines in copper, iron ore and oil due to concerns over global economic growth and supply. The mining and energy sector downturn has further impacted global coal fundamentals that have been weakened by strong seaborne supplies and slowing import demand.”

Met coal demand will grow faster than supply for the first time since 2011

“In 2015, we forecast that seaborne metallurgical coal demand growth will outpace supply increases for the first time since 2011. This is based on a moderate rise in global steel production along with Australian metallurgical coal export growth that will be offset by supply reductions from the U.S. and Canada. Drilling down on metallurgical coal demand, Indian imports grew nearly 20% in 2014 and are expected to continue to rise as the economy grows and infrastructure continues to be buildout. In China, metallurgical coal import demand is expected to stabilize as the year progresses. And over time Chinese seaborne demand is anticipated to expand as domestic production is rationalized and greater amounts of high quality coal imports are required”

15 m tons of met coal supply cuts will come in the first half of the year

“Regarding global metallurgical coal supply, we expect some 15 million tons of already announced cuts will be realized in the first half of the year, with additional reductions likely based on the current pricing. A sizable percentage of global metallurgical coal is uncompetitive at current prices. And U.S. production is likely to be disproportionally impacted leading to at least 10 million ton decline in the U.S. metallurgical coal exports this year.”

No one is investing in coal supply, there are going to be supply shortfalls eventually

“It’s clear that investments in metallurgical coal projects have all been dried up in the past two years and new projects can take years to bring online. Yet this is a depleting resource and we expect that the sharp pullback in investments, declining production and increased coal demand will result in supply shortfalls over time.”

PRB coal will be competitive with Nat Gas. Projecting increase in utility coal consumption by 2017

“Looking forward, we see 2015 U.S. coal demand declining 50 million to 60 million tons in total due to lower natural gas prices, but at the same time, we believe PRB coal will remain competitive with natural gas leading to PRB consumption rising up to 20 million tons this year. By 2017, we’re projecting a total increase in utility coal consumption of 10 million to 30 million ton as coal rebounds to approximately 40% of U.S. electricity. More importantly for Peabody, we expect PRB and Illinois Basin demand to grow 50 million to 70 million tons during this time.”

Still demand from low cost basins

“Demand for these low cost basins is anticipated to represent a greater share of the U.S. coal generation profile as gas prices increase, demand from other regions has displaced and coal plant retirement are offset by higher plant utilization rates at the remaining coal fleet.”

Australia has some competitive advantages

“We believe that Australia holds a number of inherent competitive advantages by other supply sources. It has high-quality products that are location advantaged with shorter rail hauls and shipping distances to the high growth base in marketplace. Clearly, the currencies of wind at our back right now. Australia is also in the process of completing a free-trade agreement with China that will provide a further advantage compete with other production regions.”

Peabody Energy 3Q14 Earnings Call notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Chinese imports of met coal were tepid, but India had strong growth

“Seaborne metallurgical coal market saw tepid Chinese imports and steel production growth, while India remained a bright spot. India’s metallurgical coal imports increased over 20% through September, further indication of the country’s strong reliance on the seaborne market to meet the vast majority of its metallurgical coal needs.’

China will continue to rely on coal

“Peabody recently completed a more thorough review of China, and when we looked through the short-term fluctuations, we’re confident that coal will be the dominant energy source for decades to come. China will continue to depend on coal for economic development and affordable energy to support major urban population growth, and China has taken dramatic steps to improve emissions by installing more control technologies. This year alone China is adding approximately 150 gigawatts of NOx controls. That’s equivalent to half of the entire U.S. coal fleet, with more to come.”

Coal is taking back some share in the US

” in the U.S., coal volume is on pace to increase 15 million tons in 2014, reflecting the competitiveness of coal even with a mild summer and continued rail constraints. U.S. coal generation increased 3% through September despite summer cooling degree days over 8% below normal levels in the coal heavy legions. PRB inventories ended this summer at the lowest level in nine years and the restocking period is expected to continue through 2015 and beyond as some utilities look to increase stockpiles in response to rail constraints”