World demand for coal is expected to grow by 7 percent through 2030 as a result of emerging markets prioritizing cost effective energy production methods over environmental sustainability. India and Southeast Asia hold 26 percent of the world’s population but account for only 13 percent of global energy production. Coal energy’s cost efficiency will be vital to these emerging nations’ strive towards the upper echelon of global markets. The production of coal energy in the last decade has already risen exponentially to fuel the initiating growth of Asian economies. While renewable energy demand in the developed world is expected to increase 53 percent over the next 15 years, it will remain a modest threat, as coal demand will still be significantly higher. ExxonMobil (XOM - Analyst Report) eyes a similar timeline for world coal demand, estimating peak market conditions in 2025. Coking coal (steelmaking coal) demand is also on the rise with the steel and chemicals industries requirements for coal are approaching record quantities. The requirement for steelmaking coal will be a centric driver of growth in the industry.
Supply is falling with lower coal prices leading to closures and decreased investment in the industry. In the long run, the supply of coal is expected to be nearly slashed in half according to Swiss commodity trading giant Glencore Plc (GLNCY - Snapshot Report) . The increased demand and faltering supply is likely to lead to the balanced market investors are hoping for. The major mining companies are capable of surviving the lower pricing which puts them in a position to come out on top with market improvements, while smaller scale companies with less capital will not be able to keep pace and will eventually exit the market.
Top Industry Players to Benefit
Teck Resources (TCK - Snapshot Report) is Canada’s largest diversified resources company that has seen massive growth through the recent boom in commodity stocks. With 34 percent of their total profits derived from steelmaking coal, they currently stand as one of North America’s top producers in this niche. The company has seen rapid growth recently, even through a period of downturn in the coal industry. Emerging markets are pushing the demand for steelmaking coal due to their need for developing steel infrastructure. India’s imports of steelmaking coal are increasing 8 percent each year and this trend will continue through 2021. 50 percent of Teck Resources’ steelmaking coal is exported to this part of Asia. 25 percent of their exports are sold directly to China. The commodity giant will benefit from the economic growth of developing Asian nations. Analysts have upped earnings estimates from $0.01 EPS to $0.31 for the year end. Teck Resources has revealed that they are generating positive cash flow from all but one of their operating facilities. Management has been effective in controlling costs through a period of low commodity prices which is an optimistic sign for future earnings. The company beat Zacks consensus EPS estimates in each of the last four quarters with a 4 quarter surprise of +114%. Teck Resources is currently on Zacks #1 Rank with a price target of $14.00.
The world’s top steelmaking coal miner BHP Billiton(BHP - Analyst Report) is planning to boost its steelmaking coal output by 8 percent over the next three years. Meanwhile, they intend to slash coal mining expenses by 9 percent and overall company costs by 16 percent to advance profits in this volatile market. Mike Henry, president of BHP Billiton Minerals Australia stated in a company release, “The developing world needs steel, steel needs coking coal, and we have the strongest resource position in the seaborne market”. The company believes China will continue to import vast quantities of steelmaking coal due to their coastal market access. BHP Billiton intends on being the top international facilitator of China’s, India’s and other Asian markets’ steelmaking coal needs. The global miner is eyeing Anglo American Plc’s Australian steelmaking coal mines as an acquisition target proximate to their current operations in the country to expand their control of the coal market. Analysts recently increased EPS consensus estimates by 23.5% to $0.21 EPS for the year, as a result of the company’s intentions to expand into emerging markets, coupled with their strategic plan to maximize efficiencies. BHP Billiton has seen productivity gains of $3 billion since 2012 with a further estimated gain of $600 million in 2017. The company’s increased efficiencies has allowed them to remain cash positive in all of their operations. Therefore, BHP Billiton has become less prone to market conditions by putting more power into their own hands. BHP Billiton is currently ranked as a “Buy” by Zacks.com with a price target of $32.00.
2016 Election
The upcoming U.S. election could improve the condition of coal miners with domestic mining interests. The United States is sitting on the largest coal hotbed in the world with well over 200 billion tons of reserves. With the cheap nature of coal production and ease of domestic access, the United States is likely to seek this competitive advantage in its energy production with a Donald Trump presidency. Trump has expressed his strong willingness to repeal strict regulations on coal production which have tediously driven up operating costs for mining companies. Companies with large scale steelmaking and energy coal operations in the U.S. like Rio Tinto (RIO - Analyst Report) , Consol Energy (CNX - Analyst Report) , and Peabody Energy stand to benefit from abolished laws which would provide an easy avenue to increase efficiencies to better handle exporting to high-demand developing countries.
An imbalance in the coal market certainly exists in current conditions, but the rise of emerging economies is increasingly growing the requirement for both energy and steelmaking coal. With coal companies adapting to poor conditions, they are becoming better suited to cut costs and deliver returns for investors even through low commodity prices, decreasing overall risk in major mining company stocks.
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