IB Net Payout Yields Model

Alpha Natural Resources Jumps on China & India Coal Demand Projections

Alpha Natural Resources (ANR) also had a decent earnings report, but the stock is mostly up 5% today because of the growing projections of coal import demand in India and surprisingly to a lessor extent in China. Recently China has become a big importer of coal and especially met coal due to huge growth and various issues with mine consolidation projects that have limited domestic coal production. Some people project that China will be able to limit coal imports as these mines come back online. India is a different story and will likely continue to need external coal supplies to meet surging demand.

Supposedly the headlines numbers of $.62 for ANR was disappointing. It was significantly better then last year and suggestive of higher stock prices so sometimes its best to focus on the trend and the relative valuation. The most interesting comments were on the impact of China and India demand in both thermal and met coal. As the US tries to prevent new coal plants, the rest of the world continues to move forward with them driving up demand. After all, poor consumers can't afford to adopt expensive renewable energies.

Q2 report from ANR:

-- EBITDA from Continuing Operations was $199 million, up from $68 million last year
-- Income from Continuing Operations of $39 million compared with $17 million last year
-- Metallurgical coal shipments increased 122% year-over-year
-- Share repurchase of up to $125 million authorized and $25 million repurchased during the quarter
-- Following the successful amendment, extension, increase and $40 million prepayment of Alpha's secured credit facility during the second quarter, liquidity totaled $1.5 billion on June 30, 2010

--Seaborne demand for thermal coal continues to increase, driven primarily by increasing Chinese and Indian imports. China's electricity consumption rose over 21 percent in the first half of 2010. This growth is drawing increasingly on seaborne thermal coal with June imports on an annualized pace of 97 million metric tonnes, up from an annual pace of 76 million tonnes in May. China is currently projected to import 90 to 100 million tonnes of thermal coal per year. While growing off of a smaller base, India is likely to represent an even greater long-term growth opportunity for seaborne thermal than China due to the relatively lower quality of India's indigenous reserves. Indian imports are forecast to rise at approximately 10 percent annually and are projected to reach 100 million tonnes by the middle of the decade. This rapid Asian demand growth for seaborne thermal coal is straining the export capacity of Indonesia and Australia which together account for approximately 50 percent of the world's seaborne thermal supply. To keep up with growing Asian demand, South African and Columbian coals that traditionally served the European market are increasingly moving into the Asian market, which should create an opportunity for U.S. exports into the Atlantic basin in the near future.

--Global demand for metallurgical coal remains strong despite cyclical challenges, including the near-term slowing of economic growth in China and uncertainties surrounding European economies. Steel production is increasing globally and is primarily being driven by China. Despite a widely anticipated slowdown in the second half of the year, China remains on track to produce roughly 620-630 million tonnes of steel, up approximately 10 percent from 570 million tonnes in 2009. Chinese metallurgical coal imports have risen from nearly flat in 2008 to 34 million tonnes in 2009, and China is on pace to import more than 40 million tonnes in 2010. While internal met coal resources can be developed and imports from Mongolia can be increased over time, China is likely to remain dependent on seaborne imports of high quality metallurgical coal for the foreseeable future. As with thermal coal, India may offer the more persistent long-term growth opportunity for seaborne metallurgical coals due to the absence of quality domestic reserves. Indian imports totaled 28 million tonnes in 2009 but are projected to ramp steadily, nearing 50 million tonnes by 2015. In this environment of growing metallurgical coal demand and limited sources of supply globally, prices have tested near-record levels.

Report on theStreet.com regarding India coal needs:

  • The recent Adani coal deal may just be the beginning, as severe coal shortages could compel Indian power companies to purchase coal mines or forge joint ventures with major coal exporters such as Australia, Indonesia and South Africa.
  • Reliance Industries, the largest Indian company with a market capitalization of $72.1 billion, plans to invest more than $15 billion over the next decade in power transmission projects. The company will bid for three ultra-mega power projects of 4,000 MW capacities each in India. In parallel, Reliance is planning for coal mines in Australia, Indonesia and South Africa, three biggest coal exporting countries.


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