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.”