Markets

Coal Demand and Pricing Remain Strong at Peabody Energy

By David Phillips

Updated on: October 16, 2008 / 11:34 PM EDT / MoneyWatch

The Company: Peabody Energy, the world's largest coal company, fueling approximately 10 percent of all U.S. electricity generation.
The Filing: FORM 8-K filed with the SEC on October 16, 2008.
The Finding: Despite the ongoing credit crisis and uncertainty about economic growth, Peabody Energy said it sold 66 million tons of coal in its third-quarter 2008 ended September 30, up six percent from year-ago levels. Thermal coal prices remain strong, too, driven by demand growth and tight global supplies.

The Upshot: Chairman and Chief Executive Greg Boyce opined on the earnings call that coal should be better able to weather an economic downturn than most other commodities, for it is a basic staple needed in the generation of electrical power. In addition, given the around-the-clock baseload nature of coal-fueled electricity, it is far less elastic to GDP than other commodities. A one percent decline in GDP in the United States would only correlate to a 0.5% reduction in electricity, Boyce said.

Roughly 300-gigawatts of new coal-fueled generation is under construction worldwide and expected to come on line over the next several years, requiring up to 1 billion tons of annual coal supply, according to the company. Driven by this increased consumption and decreased output from traditional coal-exporting nations, such as China and South Africa, pricing for premium Powder River Basin thermal coal remained at levels (in the upper teens) about 49 percent above realized 2007 pricing. In addition, pricing for Illinois Basin coal (at about $84 per short ton) has more than doubled since the start of the year, due to its proximity to Eastern U.S. and export markets. Peabody is the number-one producer in both the Powder River Basin and Illinois Basin.

Peabody is insulated from any material decline in thermal coal pricing, with most of production largely contracted for 2009 (at higher realized prices than 2008). The company has 10 to 20 million tons of U.S. volume un-priced for 2009 (mostly in regions experiencing strong demand) and 75 to 85 million tons for 2010.

The Question: As new mining operations are stalled due to scarce global financing, such as projects in Indonesia and Mozambique, will the cost of adding to reserves increase for Peabody and other thermal coal producers?