Peabody Energy reported its second-quarter 2018 operating results this week, which included a 4% increase in revenues to $1.31 billion driven by a 20% increase in Australian met and thermal coal sales.
“Peabody’s diversified portfolio continues to generate substantial returns, led by 39% margins from the company’s Australian platform, as we capitalize on continued strength in seaborne metallurgical and thermal coal fundamentals,” said Peabody President and CEO Glenn Kellow.
Australian sales volumes totaled 7.9 million tons, including 2.9 million tons of metallurgical coal sold at an average price of $143.98/ton and 2.9 million tons of export thermal coal sold at an average price of $78.68/ton, with the remainder delivered under a long-term domestic contract. Peabody’s Australian metallurgical coal segment generated revenues of $417.5 million, a 45% increase compared to the prior year, largely due to sustained demand for quality metallurgical coal and healthy seaborne pricing levels.
The strong performance from its Australian operations helped offset the impact of lower U.S. volumes. Revenue per ton increased modestly compared to the prior year, but the tonnage decreased 5%. U.S. costs per ton increased 8% to $15.12/ton, the company said.
Seaborne thermal demand led to further strengthening in prices during the quarter, with Newcastle spot pricing reaching highs of approximately $116 per metric ton (mt) in the second quarter. Chinese thermal coal imports rose approximately 20%, or 19 million mt, through June compared to the prior year on sturdy industrial activity and an approximately 8% increase in thermal power generation. Domestic coal production has been unable to keep pace with the increased power generation and industrial demands, along with customer restocking.
India’s domestic coal production has also been unable to keep pace with growing electricity demand, resulting in an approximately 13% increase, or 9 million mt, in thermal coal imports through June compared to the prior year. Peabody reported that coal inventories at India’s power plants remain below targeted levels, further supporting the need for additional thermal coal imports.
In addition, ASEAN imports increased compared to the prior year on continued urbanization and general economic growth. Peabody expects this trend to continue as 56 gigawatts of new coal plants in 24 countries worldwide are expected to come online in 2018. The majority of new plants are located in the Asia-Pacific region, with additional plants announced in a number of other countries anticipated to come online in future years.
Turning to metallurgical coal, reference prices eased from the first quarter of 2018 but remain above historical averages, reaching a high of $201/mt in the last quarter. Global steel production remains strong, rising 4% year-to-date through May, with May output increasing more than 6% to an all-time high.
Despite continued strength in Chinese steel production, metallurgical coal imports declined approximately 7 million mt year-to-date through June compared to the prior year primarily due to increased reliance on domestic supplies.
As expected, India continues to lead the growth in metallurgical coal demand, with imports increasing approximately 16% through June compared to the prior year driven by an approximately 5% increase in steel production.
Australian exports rebounded from the prior-year effects of Cyclone Debbie, increasing approximately 7 million mt through May compared to the prior year. While the Aurizon rail and labor issues in Queensland continue to garner significant media attention, Peabody said it has yet to be impacted by delays in rail services and continues to closely monitor the situation.
Compared to the prior year, second-quarter 2018 seaborne hard-coking coal spot pricing remained steady at an average price of approximately $190/mt. The index-based settlement price for premium-hard coking coal was approximately $197/mt compared to approximately $194/mt in the prior year. The second-quarter benchmark low-vol PCI price was negotiated at $155/mt, with the third-quarter benchmark settled at $150/mt.
In the U.S., industry conditions remain challenged as utility coal consumption declined 5% from the prior year, despite a 4.5% increase in total load. Natural gas and wind generation continued to rise and retirements continue to weigh on coal demand and account for an estimated 3% of the decline in year-to-date coal demand. PRB demand decreased 5% due to ongoing pressure from retirements and regional natural gas prices that continue to trade at a discount to quoted Henry Hub prices.
While domestic demand has weakened, U.S. exports have continued to benefit from strong seaborne pricing, with thermal exports through May up 48% compared to the prior year. Stockpiles have decreased from the prior year by an estimated 34 million tons as of the end of June to approximately 46 days of maximum burn.
While this sign is encouraging, the company said it continues to focus on value over volume. Peabody has tightened its annual PRB volume guidance range to 115 million to 120 million tons.
