Iron ore shipments are up out of Western Australia recently, and on the eastern coast at the Dalrymple Bay coal export terminal near Mackay, coal shipping has hit a 10-month high with 5.6 million tonnes heading out overseas. This is in the midst of coal producers scaling back developments and increasing cost-cutting to manage better while coal prices are flagging.
Similar to iron ore, for a number of months large coal importers like China have been holding back on buying new stock and using up inventories. They still need the coal for energy production and for producing steel, and only recently has Chinese steel exports improved, so this export increase may be the result of their steel producers depleting inventories and now needing to restock.
For energy, China will require more and more over the next two decades as an estimated 25% of its population moves from rural to urban areas. However, big moves to develop more nuclear power, effectively doubling current nuclear generated levels, and the growing concern of air quality from coal-fired electrical generation may slow the increase of coal exports.
Japan is also a major coal importer, and with its nuclear power plants effectively shut down after the nuclear disaster in 2011, it has to increase coal and gas imports to keep the energy-hungry third largest economy in the world running.
As coal companies are tightening down, workers are being made redundant, and some industry consolidation is to take place, who will be the winners? Trains.
Pacific National Coal, the coal haulage division of rail transport and logistics provider Asciano (ASX: AIO), is the largest coal transporter in New South Wales, and growing in Queensland. Coal is the largest profit producer of the parent company, earning $287 million before interest and tax (EBIT) on $1.02 billion in revenue.
Aurizon (ASX: AZJ), the former QR National, is the largest train transport provider in Queensland, and made $319 million in EBIT in 2013 from $1.86 billion in coal-related shipping. One advantage that it has over Asciano in the Sunshine State is it owns the rail lines on which it and its competitors run, so it gets service fees earnings — $424 million EBIT this year.
The two companies have roughly the same total revenue — between $3.5-$3.6 billion. Aurizon has manageable gross gearing at 38%, and has been growing earnings per share (EPS) from 8.36 cents per share to 22.85 cps over the past three years. Currently, it has a 22.4 price-earnings ratio.
Asciano has a more diversified revenue stream, and a larger rail transport business in the western states. EPS has grown from 11.76 cps to 35.6 cps over the same period, and its PE ratio is 16.4.
Foolish takeaway
The coal producers will make themselves leaner and stronger by reducing costs, but they have to actually increase shipments to maintain earnings if per tonne spot prices remain low. That means more train transport for basically the only two major rail companies in Queensland.
Look for companies that have geographical and infrastructure advantages. Companies still have to use them, and if there a few service providers, the lack of intense competition gives them pricing power.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
