In early December Peabody Energy (NYSE: BTU), the world's largest private sector coal company, gave a presentation about mid-term supply and demand for coal out to 2017. It projected that India's coal demand would rise by 26.7%, and China's would increase by 20.2%.
China's total usage is about five times that of India, but as both are net importers of coal, 80% of the total projected demand increase over the next four to five years will be coming from these two countries.
India and China are fast-growing economies that need more energy, so both will compete over the same coal. The company also estimates that an increase in steel production will require an extra 150 million tonnes per year of metallurgical coal in 2017.
Last year Australian thermal coal prices dipped to about $82/tonne in August, and coal companies began feeling the pinch. Larger, low-cost producers increased sales to support earnings, yet new developments and greenfield projects were put on the back burner until spot prices improved.
November 2013 thermal coal prices have worked their way back up to about $88/tonne. Similar to iron ore demand, as steel producers and power generators use up their stock, eventually they will have to replace it, so investors need to watch spot prices and keep abreast of developments.
New Hope Corporation (ASX: NHC) reported at the end of November that quarterly coal production was down 7% to 2.94 million tonnes compared to the previous corresponding period, yet the volume of coal sold increased by 7% to 1.4 million tonnes. They are in cost-management mode until spot prices improve.
While BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are looking to scale back coal operations, Glencore Xstrata (LSE: GLEN) is investing more into thermal coal. It projects that coal exports will rise 12% by 2016, and supply will be constrained because low spot prices will take some mines out of the picture as demand builds up.
Foolish takeaway
Short-term situations create opportunities for investors when the market misprices companies according to their immediate near-term earnings and overall popularity of the industry. Countries like China do want to improve the environment and a move to natural gas or nuclear power will also create opportunities.
However, coal is a cheap source of energy, so when bottom line decisions are made, it remains on the agenda. If thermal coal can get back above $100/tonne, then coal production increases again.
