(Idea) Peabody Energy
We’re constantly looking for new angles to put our energy sector expertise to work. We were recently intrigued by the idea that coal producers would offer attractive upside in a natural gas bull market. After all, high natural gas prices induce electric utilities to switch their power generation from gas to coal. When carried out on a large scale, the sudden boost in coal demand without a commensurate boost to supply results in a price surge. Since we’re increasingly confident in the natural gas bull thesis, we want to investigate whether coal producers might benefit from such a move higher in coal.
Our top choice among coal companies was the largest U.S. producer, Peabody Energy (BTU). Unfortunately, we couldn’t get past the macro and micro negatives that face the company in both the near term and the longer term. We concluded that investors looking to play the bullish natural gas thesis should take a pass on coal names and invest directly in gas-weighted E&Ps.
Coal’s Macro Challenges
Coal is a global market, so naturally, an appraisal of a coal company should be conducted hand-in-hand with an analysis of the global coal market.
Many investors might be surprised to learn that the outlook for global coal consumption is bright. Coal consumption has in fact increased for decades, and growth shows no signs of slowing down.
Source: Energy Institute Statistical Review of World Energy, 2023.
Coal consumption growth has been led overwhelmingly by China and India. In 2023, these two countries alone accounted for 69.4% of global coal consumption, according to the Energy Institute’s authoritative Statistical Review of World Energy.
The share of the world’s largest coal consumers is shown below.
Source: Energy Institute Statistical Review of World Energy, 2023.
Coal consumption is heavily concentrated in a few countries. In 2023, the top ten consumers accounted for 88.4% of global consumption.
The problem for exporting countries like the U.S. is that many of the largest coal consumers are also the largest producers. For instance, China and India produce massive quantities of coal.
Source: Energy Institute Statistical Review of World Energy, 2023.
Both China and India are likely to continue growing their production in response to growing demand.
In fact, only two of the top six coal consumers run a domestic supply deficit. The chart below shows the percentage of coal sourced domestically among these consumers. India and Japan are the only consumers relying on imports to meet their consumption needs.
Source: Energy Institute Statistical Review of World Energy, 2023.
The coal import needs of India and Japan comprise only 6.5% of global supply. This is the portion of global coal consumption that has to be met by coal exporters. Due to its small size and the abundance of coal, it’s easily met by exporters such as the U.S., Australia, Indonesia, and Russia.
Consumption outside of the largest coal-consuming nations, meanwhile, has trended lower over recent decades, as shown below.
Source: Energy Institute Statistical Review of World Energy, 2023.
Aggregate consumption among this group is likely to continue to trend downward over at least the next few years, given the global push to reduce carbon dioxide and other emissions by phasing out coal.