Status Report: The Bustling Market for Exported U.S. Coal

Against the backdrop of a crushing collapse in the shares of U.S. coal producers last year, one important segment of the market for U.S. coal celebrated some noteworthy success.

Peering through the wreckage of major producers Arch Coal and Alpha Natural Resources -- both of which have shed roughly half of their market value over the trailing year -- we witness the deep and lasting impacts of the ongoing natural gas revolution. But that's not the whole story!

You see, as diminished domestic coal consumption feeds elevated stockpiles and weakens prices, that underutilized supply becomes increasingly attractive to buyers outside the country.

As we'll explore in greater detail in a forthcoming discussion (bookmark this page to catch my next installment), major producer Peabody Energy -- my long-standing top pick within the industry -- took decisive steps during 2012 to enhance its access to this important seaborne trade. CONSOL Energy -- one of the very few domestic producers to outperform the benchmark Market Vectors Coal Index ETF over the past year -- has undertaken a timely expansion of its key port facility in Baltimore, Md. These efforts highlight the changing character of what it means to be a competitive coal producer within this transformed structure of the U.S. coal market.

We'll survey the relevant transportation infrastructure, and consider which coal producers may be best positioned to access that infrastructure, in a forthcoming discussion later this week. For now, let's get a status report on the particular hotbeds of demand for exported U.S. coals that are so important to these impaired domestic producers. But first, a quick word on the broader outlook for global coal demand.

The medium-term and long-term outlooks for global coal demand remain extremely bullish, with China and India expected to drive roughly 85% of total demand growth over the next several years. By 2016, the addition of 395 gigawatts of coal-fired power plants will grow demand by 1 billion metric tons. Global steel production looks poised for a 20% upswing over the same period, resulting in a substantial surge in metallurgical coal consumption to the tune of 200 million metric tons per year. Combined, these powerful trends will likely drive a 7% annual growth rate in the seaborne trade for coal over the medium term.

Status report: the market for exported U.S. coal
The United States shipped more coal into the global seaborne market last year than ever before -- crushing the previous record of 113 million short tons set back in 1981 -- with 2012 exports reaching 124 million tons. Over the trailing three years, total export volume promptly doubled! Such an astounding growth rate will not be sustained, and 2013 exports will likely see some pullback as domestic consumption rebounds slightly. But those bullish global demand forecasts do bode well for the underlying growth trend over the longer term.

With much of the trailing growth dominated by increased shipments of metallurgical coal in recent years, the more recent reduction in domestic demand for steam coal has now strengthened the base for elevated exports across both product types. The following graphic from the U.S. Energy Information Administration depicts this recent surge in steam coal exports, which -- through the first eight months of 2012 -- accounted for 95% of annualized export growth.

Source: U.S. Energy Information Agency, October 2012. The agency's projection at the time for total 2012 exports of 125 million tons overshot the mark by only 1 million tons.

Now let's have a look at where these coals are heading. With Asia at the epicenter of demand growth, the expanding shipments of U.S. coals to Asia come as no surprise. I discussed the strategic importance of export access to the Pacific seaborne trade, particularly as it pertained to metallurgical coal, back in 2011. What may come as something of a surprise to Fools, meanwhile, is the rate of growth in coal exports to Europe, even in the midst of the continent's noteworthy financial crisis that boiled over during 2012.

Two main factors are behind that growth in Europe's demand for U.S. coal: the diversion to Asian markets of coal supply traditionally bound for Europe, and more notably, the absence of competition from natural gas for power generation under the prevailing price structures there. According to analysts at Deutsche Bank, coal prices would have to rise by roughly $80 per metric ton before natural gas could become competitive with coal for power generation on the continent.

This is fueling what The Economist recently bemoaned as "Europe's dirty secret," an "unwelcome renaissance" in European coal consumption. Coal powered 72% of the electricity generated by RWE Group -- one of the continent's largest utilities -- through the first nine months of 2012. That's fully 6 percentage points higher than the 66% allocation to coal-fired generation during the prior-year period! The next chart, which tracks U.S. coal export volumes according to their destination (for the period between 2001 and 2011), clearly demonstrates the meaningful role of European import demand within the U.S. seaborne market.

Source: U.S. Energy Information Agency, June 2012.

The Foolish bottom line

The coal industry in the United States has been in a state of flux since the arrival of a cheaper alternative for energy production: natural gas. Exports are becoming a much bigger part of the domestic coal landscape. Peabody Energy has attractive deals in place to get its cheaper coal from the Powder River and Illinois Basins to India, China, and the EU. For investors looking to capitalize on a rebound in the U.S. coal market, The Motley Fool has authored a special new premium report detailing exactly why Peabody Energy is perhaps most worthy of your consideration. Don't miss out on this invaluable resource -- simply click here now to claim your copy today.

Later this week, I'll continue this discussion by taking a close look at the transportation network responsible for hauling product from the various U.S. coal basins to their respective port facilities, and loading it onto ships through the nation's key port facilities. We'll explore whether some producers may have an upper hand with respect to accessing this key export market. Please stay tuned by bookmarking my article list or following me on Twitter.

The article Status Report: The Bustling Market for Exported U.S. Coal originally appeared on Fool.com.

Christopher Barker owns shares of Peabody Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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